We are looking forward to welcome many of you to our Mobile Future Forward Summit next week. This is the final interview in the series and it is with our opening keynote speaker Matt Grob, EVP, Qualcomm Technologies and CTO. I am really excited that we will kick off the summit with Matt as he has deep experience and knowledge of the space and a compelling vision for the future. In his 23+ years at Qualcomm, he has been instrumental in taking many technologies to the market that we take for granted today. I had a chance to catch-up with Matt to give you a preview of our discussion at the summit next week.

MFF: The chipset roadmap gives us a sense of what new devices will emerge from the mobile platform. What are some of the things on the horizon that you are excited about, and that developers should pay attention to?

Matt: We continue to see a tremendous amount of innovation in smartphones. In the next 5 years, analysts estimate that nearly 8 billion smartphones will be sold worldwide. That amount is larger than the world’s population! With such scale, there’s no doubt that mobile will continue to be a focal point for technology R&D — with major advancements not only in the chipset feature set, but also in the evolution of software, and mobile networks. Many of the things we foresaw a few years back are already in commercial devices, things like LTE Advanced, Ultra HD, wireless charging, surround sound, and computational photography.

Moving forward, I’m pretty excited about further advancements in LTE, things like LTE in unlicensed spectrum, and LTE Direct. These technologies will make mobile networks much more capable and useful. On the device side, we’ll see more low-power processing and sensor technologies, and new developments in computer vision that will improve the context awareness capabilities of mobile devices.

And I’m personally passionate about the developments we’ll see in the field of machine learning — the evolution of processor platforms that mimic the way the human brain thinks and sees. This will be a game changer — since we finally will be able to “teach” our machines instead of simply “programming” them.

MFF: We know that rising data consumption is a challenging issue for mobile operators worldwide. Looking out over the next 5 years, what kinds of solutions do you anticipate? And how big a part will unlicensed spectrum play?

Matt: Although the numbers vary depending on the region, we continue to see solid growth in data demand. According to the CTIA, mobile network operators in the U.S. saw a 120% year-over-year (YOY) increase in data traffic in 2013, compared to a 69% YOY increase in 2012. In emerging regions, we are still in the early days of smartphone adoption, so we should expect further increases in data demand, as people adopt more advanced mobile devices.

We anticipated a day in which networks will have to deal with a thousand times more data traffic than they handle today. We called this the 1000x data challenge. To solve it, our industry has implemented a range of strategies. Of course spectrum is critical. We’ll need to squeeze more out of existing spectrum and we’ll need to find more of it. That’s going to involve taking advantage of multiple access schemes, including licensed, unlicensed, and shared access.

We’re also working on continuing the evolution and enhancement of LTE, including carrier aggregation strategies. Other network efficiencies will be achieved through advancements in 3G, 4G and Wi-Fi technologies. Another key strategy is network densification. We’re working to beef up mobile network infrastructure with the deployment of advanced small cells.

We’ll need all of these tools to address the continuing rise in demand for mobile data, because the fact is that people in every part of the world love their mobile devices, which is a pretty exciting challenge for our industry.

MFF: Mobile is changing so many industry verticals — health, auto, retail, energy, and more. Which verticals are you the most excited about, and why?

Matt: The huge scale of the mobile industry and the rapid design cycles associated with it are driving a tremendous amount of technology innovation. And those breakthroughs are now driving innovation in a growing number of other industry sectors. The components and capabilities that have been invented, integrated, refined, and dramatically cost reduced within modern smartphones are now poised to revolutionize and enable whole new categories of devices, sensors — and machines.

I’m particularly excited about how these mobile innovations will accelerate the evolution of robotics. Drones and robots are taking a lot of the technology developed for smartphones. Things like wireless connectivity, image stabilization, computer vision, precise outdoor and indoor location, and low power processing, are all now contributing to the evolution of robotics as well. And the scale of deployment of those technologies is making robots much more affordable as well. Today we can find hobby drones that sell for less than $1,000.

As part of our R&D effort at Qualcomm we’re building experimental robots that can learn to perform some menial tasks without prior programming, things like sorting toys and organizing them in bins. And all running on the same Snapdragon processors that power many of the most popular smartphones today. It’s exciting to see how smartphone technology is accelerating the development of general-purpose robots and drones, and I’m grateful to have a front row seat, not only as a witness that evolution, but also as a participant in the robotics revolution.

MFF: The “Internet of Things” continues to make headlines and holds great promise, but the growth has been slow due interoperability, security, regulatory, and other issues. What will it take to move past these issues and see the growth rate graph take the anticipated hockey stick shape?

Matt: Everything around us is becoming intelligent and connected, changing the way we interact with the world: phones, tablets, cars, appliances, and health devices. We use the term “Internet of Everything” (IoE) because not only “things” are getting connected, but also places and people.

The IoE is still in its early days, but the ecosystem is coming together to solve some of the key issues preventing the full realization of its promise. Until recently, most IoE products and services have existed in silos, as vertical solutions — without the capability to connect and interact with each other. The challenge is, how to create a horizontal, secure, interoperable environment. We believe that AllJoyn is key solution for moving the industry in the right direction. AllJoyn is an open, universal, and programmable software and services framework, initially developed by Qualcomm Innovation Center and now hosted by the AllSeen Alliance.

Qualcomm backs the AllSeen Alliance as it drives the AllJoyn open source project forward, as the common language for the Internet of Everything. The AllSeen ecosystem consists of a broad representation of cross industry leaders looking to enhance AllJoyn via open source contributions, and to commercially deploy smart connected devices that can discover, connect and communicate with each other across brands and device categories.

The consortium now counts more than 60 members, including many big names in technology and consumer electronics. This level of support increases our confidence about the future. I think we’re close to reaching a tipping point in the development of a truly interoperable IoE.

“Advertising, once a gamble, has become under able direction, one of the safest of business ventures. Certainly no other enterprise with comparable possibilities need involve so little risk.”

- Claude Hopkins, Scientific Advertising, 1923

We are looking forward to welcoming you to our Mobile Future Forward Summit next month. We are doing interviews with some of the thought-leaders leading up to the event to give you a glimpse of the upcoming brainstorms. Mobile Advertising has been at the heart of the mobile economy. Seven years ago when I was co-authoring the book on the subject, it was clear to us that mobile will fundamentally transform advertising. Slowly but surely, we are getting there.

In our Mobile Advertising panel at the summit, with the help of some really experienced executives who deal with advertising day-in and day-out, we will explore the future direction of the advertising industry. One of the distinguished panelists is Erin Kienast, SVP at media agency Starcom USA. We caught up with Erin about her thoughts on the space.

MFF:What are some of the key characteristics of a very successful mobile advertising campaign? How do you measure success?

Erin: Success is dependent on overall campaign objectives so characteristics can vary drastically by initiative. First and foremost content is king with mobile so having mobile ready content is critical to driving success. Mobile offers such a small screen to deliver a message but it is one of the most impactful screens a marketer can deliver given personal nature of the device. Clearly articulating success metrics at the start of the campaign is critical to understand what exactly you are trying to achieve. Success can be measured at each phase of the purchase funnel; it is really dependent on what a marketer is trying to achieve. Sufficient spend is one area that often goes unnoticed when executing mobile campaigns. Mobile budgets still remain small compared to other mediums in market so spend is often passed over. It is critical to make sure there is sufficient spend backing a campaign to sustain presence in the market and allow a campaign to achieve overall objectives.

MFF:The mobile advertising industry has grown tremendously in the last 5 years, however, still there are many challenges remain for it to fully realize its full potential. If you had the power to knock-off the top 2 issues that could change the industry landscape, what would those issues be?

Erin: The top two issues are:

o Measurement/ROI: Until there is consistent measurement in place and solid ROI data, marketers will still remain hesitant to shift a larger percentage of dollars in the space. At the end of the day, marketers are tasked with moving product off of shelf and without having proven success that an investment is driving return, there will continue to be hesitancy.

o Content: Marketers and creative agencies are not prioritizing the building of mobile creative so we still do not understand the full creative capacity of the space. Now, marketers rely on partners to build a large percentage of mobile creative which results in inconsistency across partners and with other media in market for a brand.

MFF:You have been in the media business for a long time. How has the mobile world changed the consumer expectations and behaviors?

Erin: Consumers expect a brand to be there in a meaningful way. They are actually willing to provide personal information in return that they receive a meaningful brand experience. That is a major shift from TV and print advertising where consumers are not providing personal information. Consumers rely on mobile devices daily outside of previous work only usage. Consumers rely on phones for directions, recommendations, socialization, shopping, photography, weather, almost everything consumers do in life involves a mobile device. As a result, a brand must be there when a consumer is seeking them out but be there in a way that provides value. Before consumers did not expect and sometimes did not want a brand to interrupt an experience. Now it is welcomed if it is meaningful.

MFF:Where do you get your inspiration in creating unique solutions for clients?

Erin: I walk around and observe people in their natural environments on the streets, in restaurants, at sporting events, on public transportation, at the airport, etc. Observing and noting human behavior provides with me with the opportunity to capture ways to improve lives that currently doesn’t exist. People are inspiring, especially those I do not interact with daily. I love observing human behavior because it sparks a level of creativity and pushes my previous boundaries of thought to brainstorm without boundaries.

I also like to imagine the unimaginable then find a way to make it happen, even if it takes baby steps to reach full capacity. When it is said something cannot be done, I am inspired to find a way to make it happen and it’s proven successful time and time again.

MFF:As you look forward 2-3 years, what technology shifts in mobile excite you the most – things that will have a major impact on how advertising budgets are allocated?

Erin: Connectivity is the most exciting shift in my mind. Connectivity in terms of connected home, connectivity in store via lighting/beacons/camera monitoring, wearables, etc. Marketers are finding new ways to connect to consumers in more meaningful ways outside of a simple banner. The ability to deliver a brand message in a new way fueled by connectivity and devices that create connectivity is going to advance our culture in the next few years. The focus is less on traditional advertising outlets in the form of a banner and more on the technology. Take a washer as an example. Technology is advancing and these machines are becoming smart, connected to you mobile devices. How does a washing machine trigger a notification to purchase more detergent where consumers can purchase directly from their phone or tablet? This is where the future will be focused, less on creating large spots/banners, more on partnering with technology company to align with human behavior.

The US mobile data market grew 3% Q/Q and 17% Y/Y to reach $19.9B in Q3 2012. Data is now almost 43% of the US mobile industry service revenues. For the year 2012, the market is on track for mobile data revenues in the US market to reach our initial estimate of $80 billion.

Largely due to the strong postpaid performance by Verizon, the US operators added a net of 2.4M new subscribers. Sprint and T-Mobile saw further postpaid declines. For T-Mobile, Q3 marked the nine straight quarters of postpaid losses.

The quarter also saw a couple of block-buster operator M&As that took many in the industry by surprise. T-Mobile found a soul mate in MetroPCS while Softbank showed up at the altar for Sprint. Once the mergers are executed, Sprint is likely to emerge as the stronger of the two.

The two horse OS race got a new participant entry last month – Windows 8. Microsoft and its partners launched a worldwide campaign for a chance to compete. Microsoft also made a splash with the first computing device in its history – Surface. Both got a mixed reception from the market. We will find out how consumers will react in the Q4 numbers. Of all the OEMs, Q4 will be the most critical for Nokia who is running out of runway in its turnaround effort.

Despite setbacks in the IP battles, Samsung continued its march of being the undisputed unit leader in mobile device space. After displacing Nokia in Q1 2012, it continued to dominate in units shipped in Q3 2012. However, Apple dominates both the smartphone revenues and more importantly just crushes the competition on device profits. It has only 6% of the global unit shipment share but over 70% profit share. In tablets, Apple completely dominates the landscape in both shipments and revenue. In fact, 95% of the profits in the tablet segment go to Apple with the remaining ecosystem fighting for the crumbs. Apple has the complete stronghold on the supply chain and has sucked out the oxygen from the OEM world.

Amazon hasn’t been shy about its ambitions in the mobile space. While the world awaits an Amazon smartphone, the company launched a slew of tablets to compete primarily with Google though its eyes are on Apple. Apple also launched iPad mini a mid-tier tablet to ward of threats coming from the bottom tier of the market.

As we mentioned it in our last update, smartphones are now past the 50% mark in the US and continue to sell at a brisk pace accounting for over 75% of the devices sold in Q3 2012.

While the US penetration of smartphones is over 50% as we reported last quarter, the 50% of the sub base is concentrated in only 30% of the households thus leaving plenty of growth left in the marketplace.

Verizon and AT&T maintained their top positions in the global rankings by mobile data revenues. A survey of the entire ecosystem shows that the US companies dominate the top 5 rankings of profit share. China Mobile leads the industry with Apple, Verizon, AT&T, and NTT DoCoMo completing the rankings.

Postpaid Doldrums and evolution of metrics – ARPU to ARPA to AMPA

The US market has added roughly 400K postpaid subs in the last two quarters. Verizon has added 2.4M, AT&T 400K, and Sprint and T-Mobile have lost a million each. Clearly, Verizon’s performance is far superior to its competitor and its relentless focus on postpaid has yielded significant benefits. Typically, the postpaid ARPU is roughly 2-3 times that of a prepaid subscriber. So, while other operators have been adding prepaid subs, the improvement to the bottom line has been tepid especially for Sprint and T-Mobile. Sprint’s losses have been primarily due to the bleeding of the Nextel customers. The iDEN network should turn off sometime next year and the continuous loss of overall postpaid subs might stop. T-Mobile faces a deeper challenge. Its net-revenue has declined in every quarter since Q4 2008, which is 15 straight quarters of revenue decline. In fact, its current revenue levels is at the Q2 2006 levels – that was six years ago. Though the company has done a terrific job upgrading the network to HSPA+ and doing blocking and tackling until it upgrades to LTE to come at par with its peers, the continuous bleeding of the postpaid subs needs a new strategy. Metro PCS helps gain new subs and spectrum but doesn’t help with postpaid. In fact, one can expect that the churn will rise as consumers migrate from Metro to T-Mobile. 2013 will be a critical transition year for the company as it tries to compete with its larger competitors. Just being a “value” provider is the race to the bottom.

We have been advocating shared data plans to create more consumer demand for over two years. When I talked to CNBC earlier this year (Jan), I said that in all likelihood the family data plans will be introduced in the US market in 2012. I discussed this more with Bloomberg and USA Today and suggested that most likely Verizon will launch them first. Verizon and AT&T launched the shared data plans this summer with AT&T getting the benefit of launching it second. New types of plans also evolved the decades-old operator metric of ARPU to ARPA (Average Revenue Per Account) given that we are seeing a strong influx of multiple devices per individual/household. Verizon was first to transition and we expect others might introduce new matrices to measure progress and performance. AMPA (Average Margin Per Account) will also become an important metric in the coming days, first internally, and then for the markets.

Messaging Decline

Most western markets have seen the net revenue in the messaging segment decline. The US market has resisted the decline thus far. In Q3 2012, for the first time, there was a decline in both the total number of messages as well as the total messaging revenue in the market. It might be early to say if the decline has begun or the market segment will sputter along before the decline takes place. As we had outlined in our fourth wave paper, once the market segment reaches the 70-90% penetration mark, the decline begins and we might be seeing the start of the decline in messaging revenue. The decline is primarily due to the rise in IP messaging and operators have been slow to evolve their strategies in the segment.

Operator’s Dilemma (And Opportunity): The Fourth Wave

In our paper “Operator’s Dilemma (and opportunity): The Fourth Wave” earlier this year, I proposed that we need a new framework to think about the next generation of revenue opportunities. The fourth curve opportunities are massive but require a different skillset and strategic approach that the past three curves. We are starting to see operators becoming more focused and aggressive. It is being widely adopted in the operator community around the world and some operators have started to break out the 4th wave revenues in their financials. We will have more discussion about how things are shaping up in future research papers.

AT&T has been better prepared in the US market and has embraced the ride on the fourth curve. It is investing in the areas of Digital Life, Mobile Premise Solutions, Mobile Payments, and Connected Vehicles. We discussed the subject at length in our recently concluded annual thought-leadership summit – Mobile Future Forward.

Operator M&A – The Rule of Three Strikes Back

Just when you thought the prospects of any major operator M&A slowed down due to the impending US election, T-Mobile announced its acquisition of Metro PCS giving it more spectrum, access to public markets, a good chunk of subscriber base to become a more competitive number 4. Sprint and Softbank followed the announcement with an absolutely brilliant maneuver. Sun Tzu would have been proud. It provides Sprint access to capital, economies of scale, and becomes a much stronger number 3, and a global telecom player with scale and ambition. There have been some interesting twists and turns but as we have stated before, the US market competitive equilibrium will be complete when Sprint and T-Mobile get together at some point down the road.As outlined in our research paper on the subject, market forces find their way to get to 3 dominant operators that compete for attention and revenues, rest becomes noise. While the regulators might scoff at the idea, the inevitable market forces will find their way around.

Connected Devices

In Q3 2012, we released some research around connected devices. If we just look at the active connected devices which can connect to the Internet directly either by wireless or wired means, either using cellular or WLAN, the total number of connected devices in the globe just crossed the 10 billion mark which means that the connected device to human ratio is now 1.3.

70% of the connected devices use some form of wireless connection.

In the US, roughly 80% of the devices use some form of wireless connection.

For the US Household survey, we asked 1014 HHs about the number of connected devices in their households.

The average number of devices/HH was 5.

Over 6% of the HHs had 15 or more devices.

Splitting the respondents by gender, the results were about the same.

Splitting the respondents by age group, the 65+ age demographics had the highest number of devices/HH followed by the 18-24 age group.

Windows 8 arrival – Sept was a big month in Microsoft’s attempt to regain its lost mobile decade. It went from a dominant position to virtually zilch coinciding with the remarkable ascend of iOS and Android. To make any device sell – one needs good and competitive device, distribution channel and marketing muscle, and brand loyalty. I think Windows 8 is genuinely good, is different, and for the first time can stand with its peers (obviously it needs to build a robust apps portfolio and a stronger developer ecosystem).

In the past, while operators, OEMs, and Microsoft announced significant advertising spend, it had almost negligible impact on sales. The actual $ amount spend was tepid, operators didn’t want to be guinea pigs just to prop up a third ecosystem. With Windows 8, things might get better. We can see many more awareness campaigns, more OEMs are launching some quality devices, and operators are warming up to the idea as well. The brand loyalty index for Microsoft Mobile is fairly low and it will take a heavy lift and a few billion dollars of advertising spend to move the needle. The good news is that the devices are shipping and it is not thanksgiving yet.

However, Nokia, once propped at every Windows Phone rally isn’t getting any special love from Microsoft anymore (in public) and it has become one of the many OEMs on the conveyer belt. Its ability to differentiate itself enough in Q4 will decide its 2013.

Last week, Qualcomm eclipsed Intel in market cap marking another milestone in the progression of the mobile ecosystem.

Surface, mini, and the tablet market

Apple launched the iPad mini for some of the same principles that Microsoft launched Surface. It is better to be cannibalized by self than by the enemy. Microsoft saw the notebook market shrink and needed a product to stem the bleeding while Apple saw Amazon and Google attack the bottom tier with a different model that poses a credible threat. Tablet market is indeed fundamentally altering computing in many ways. The changing landscape of computing also has impact on the ecosystem and the application development environment. Developers flock to platform reach, ease of access to the marketplace, and the basic economics of a viable business model. Windows a percentage of computing platform is shrinking which threats not only the platform but also Microsoft’s other software franchises. Surface is classic blocking and tackling to provide a jolt to the shifting ecosystem. With iPad mini, Apple is attempting to lock the mid-top tier of the tablet market and daring its competitors to just play in the bottom tier that leaves no profit on the hardware and revenue stream from services for a very select few.

Apple is getting a lot of grief for its maps app. While the strategic decision to take control of a key application was spot on, it faltered on communications. The half-baked endeavor was nowhere close to being the “best mapping app.”

Infrastructure segment faces a tough road ahead

The infrastructure segment of the wireless industry is facing turbulent and interesting times. The business model for many vendors hasn’t evolved much in the last few years and some of the disruptive forces are bound to have a deep impact on the segment. ALU is facing serious headwinds and will need to figure out its strategic options going forward. Ericsson’s margins are under pressure but more interestingly its services and support revenue exceeded its hardware revenue for the first time. Huawei and ZTE reported decline in revenues but they are making gains in the infrastructure markets outside US and in handsets in the US market. Until Premier Xi Jinping and President Obama sort out their geopolitical differences, the Chinese vendors remain shutout of the US infrastructure market.

What to expect in the coming months?

All this has setup an absolutely fascinating 2013 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems. Players who firmly attach themselves to the 4th wave will reap benefits while the ones who miss it will see their fortunes dwindle.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q3 2012 US wireless data market is:

Service Revenues

· The US Wireless data service revenues grew 3% Q/Q and 17% Y/Y to $19.9B in Q3 2012. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.

Verizon and AT&T dominated the quarter accounting for 69% of the mobile data services revenue and had 66% of the subscription base.

The Overall ARPU declined by $0.15. Average voice ARPU declined by $0.58 while the average data ARPU grew by $0.43 or 2% Q/Q.

The average industry percentage contribution of data to overall ARPU is now at the 43% mark in Q3 2012 and is likely to exceed the 50% mark early next year. All the top three US operators are around the 45% mark with Verizon leading the trio. (For reference, all three major Japanese operators are now over the 60% mark).

Subscribers

The US operators added 400K postpaid subs and over 2.4M total. It was the lowest net-adds quarter in the US mobile history (barring the early days of tepid growth)

T-Mobile’s postpaid woes continued for the ninth straight quarter.

Verizon led the market with 1.7M net-adds followed by AT&T at 678K, and T-Mobile at 160K. Sprint returned to the negative net-add territory after nine straight quarters of positive growth.

For the twelfth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs.

Applications and Services

Q3 2012 data suggests that the messaging revenues in the US market might have peaked. For the first time both the overall messaging volume and the revenues declined Q/Q. The task to prolong the access revenue curve and investment in the fourth curve has become all the more urgent.

The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education.

Q3 2012 again saw tremendous activity in the mobile commerce and payments space with a lot of announcements from the operators, Internet players, and startups as well as the retailers and the ecommerce players. All are vying for a piece of the mobile wallet. Much more to come in the next 12 months. On the retail side, Starbucks is a player to watch as it tries to become a more active participant in the digital ecosystem.

Handsets

Smartphones continued to be sold at a brisk pace accounting to almost 80% of the devices sold in Q3 2012 with Android dominating though iPhone leads in revenue and mindshare.

Samsung now leads in every major unit sale category both on the world stage as well as in the US. However, profits are a different equation where Apple overshadows its rivals like Gulliver on the Lilliput land.

While it is fairly clear that Windows will acquire the #3 spot behind iOS and Android, the journey to a substantial and competitive market share is still ways off. It renewed its entry into the battlefield with Windows 8 last quarter.

Apple’s iPhone sales improved marginally in Q3 but the OEM was more plagued by the supply-chain constraints than demand.

US continues to sell over 40% of the world’s smartphone every quarter thus making it the most attractive market for OEMs.

Verizon continues to sell more LTE smartphones as its LTE sub tally rose to 15M making it the leading LTE operator in the world. AT&T’s and Sprint’s LTE rollouts are gathering steam. T-Mobile announced that it is putting the cash and spectrum it got from AT&T to good use and deploying LTE by 2013. Expect the “fastest network” marketing to continue for at least another seven quarters. Verizon reported that 35% of its total data traffic is on the LTE network now.

There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling roughly 48% of the iPhones in the US.

Mobile Data Growth

The overall data consumption in the US market in 2012 is expected to exceed 2000 Petabytes or 2 Exabytes. The smartphone data consumption at some operators is averaging close to 900 MB/mo. Some devices are averaging close to 2 GB/mo. As we move into 1GB range along with the family data plans kicking in, you can expect the data tiers to get bigger both in GBs and dollar amount.

The Signaling traffic has increased 3x.

Mobile data traffic growth is likely to slow down to roughly 80% after doubling for the last five years. Voice traffic will dip below 10% of the overall traffic in 2012.

While the spectrum debate rages on, in addition to the network and backhaul upgrades, policy management and data offload have emerged as top two solutions that operators deploying around the world. Signaling management solutions like Diameter routing are also getting good traction. However, a long-term video solution is still elusive. As we have been saying in our Yottabyte series of research papers, a comprehensive solution strategy is needed to effectively manage margins/bit.

Your feedback is always welcome.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Feb 2013. The next Global Wireless Data Market update will be issued in Mar 2013.

Disclaimer: Some of the companies mentioned in this research note are our clients.

The US mobile data market grew 5% Q/Q and 19% Y/Y to reach $19.3B in Q2 2012. Data is now almost 42% of the US mobile industry service revenues. For the year 2012, the market is on track for mobile data revenues in the US market to reach our initial estimate of $80 billion.

The US operators reversed the postpaid decline in last quarter to add almost 400K postpaid subs largely due to the strong performance of Verizon Wireless. Sprint and T-Mobile saw further postpaid declines. For T-Mobile, Q2 marked the eight straight quarters of postpaid losses.

In terms of Y/Y growth, Connected Devices segment grew 21%, Prepaid 12%, Wholesale 4%, and Postpaid was flat. AT&T, AT&T, Sprint, and Verizon are number one respectively in these categories. The connected devices segment has been an area of growth for the industry but for the second straight quarter, the Q/Q growth fell below 5%. This is largely driven by lower growth in the M2M segment.

Driven largely by the economy, the prepaid subscriptions went past 100 M for the first time in the US market. Given that the revenue from new subscribers has fallen below the 5% mark for the first time, the revenue growth will be primarily driven by services to the existing subscriber base. The new revenue will be dominated by data access revenues for the next couple of years.

As has been obvious for some time, the device ecosystem has become a two horse race – iOS and Android. Apple and Samsung. Google’s acquisition of Motorola finally closed and everyone is watching as to what comes next. Amazon showed off its ambition with Kindle Fire and is now getting ready to launch a new set of devices in time for the holiday season. Apple launches its iPhone 5 with LTE and gives some more polish to iOS next month. Microsoft will start selling its Surface tablet in a matter of weeks. The only one left out of the launching musical chairs is RIM which has pushed out its launch into 2013.

Samsung continued its march of being the undisputed unit leader in mobile device space. After displacing Nokia in Q1 2012, it continued to dominate in units shipped in Q2 2012. However, Apple dominates both the device revenues and more importantly just crushes the competition on device profits. It has only 6% of the global unit shipment share but over 70% profit share. In tablets, Apple completely dominates the landscape in both shipments and revenue. In fact, 97% of the profits in the tablet segment go to Apple with the remaining ecosystem fighting for the crumbs. Apple has the complete stronghold on the supply chain and has sucked out the oxygen from the OEM world.

Nokia’s Lumia launch in Q2 fizzled in the US and elsewhere. It will get another shot at glory and perhaps its last with the Windows 8 launch in Sept.

If we exclude the M2M subscriptions and just look at the human subscriptions, the smartphone penetration went past 50% for the first time in the US market. Smartphone sales continued at a brisk pace crossing the 70% mark (of the devices sold) in Q2 2012.

Verizon and AT&T maintained their top positions in the global rankings by mobile data revenues. A survey of the entire ecosystem shows that the US companies dominate the top 5 rankings of profit share. China Mobile leads the industry with Apple, Verizon, AT&T, and NTT DoCoMo completing the rankings.

Zuned Out

Apple launched iPod in 2001. During the early days, Microsoft ignored it until it realized it better start paying attention to the growing phenom. It asked its suppliers to build them a Microsoft iPod. One by one, they all failed. Depressed and frustrated, it took matters in its own hand and introduced Zune in 2006, full five years after the first iPod came into the market. By that time, Apple had already sold 66M units and still hadn’t hit its peak. As is customary, Microsoft took another few iterations to get it right. By the time a competitive product came out, it didn’t matter. The main reason was that the customers were Zuned Out. They had already made their choice, invested their time and money into a platform and it will take more than a crowbar to move them onto something new. Microsoft retired Zune in 2011

Fast forward to 2007. iPhone came out. Nokia, RIM, Microsoft and others dismissed it and more importantly failed to understand and acknowledge its impact. Their corporate schizophrenia is well documented. Microsoft wisely realized that it can’t just keep paring down the mothership OS for mobile and took time to rewrite it. The new OS was actually good and well designed, it was quite fresh. iOS and Android would do well to borrow some ideas from it to enhance the user experience. However, Microsoft’s partners by this time were more enamored with Android. So in Nokia, Microsoft found a partner who can help shine the light on its new shiny OS. By the time initial credible versions of the new windows OS started to ship, Apple had already shipped over 200M units of iPhone. By the time RIM ships devices with the new OS (if it gets to that point), Apple would have shipped over 300M units. Consumers have already invested their time and money into platforms and ecosystems. Will Microsoft, Nokia, and RIM get a second chance or will they be Zuned Out?

Then came the iPad that completely took Microsoft by surprise. It pioneered the concept a decade earlier but was completely outflanked by the wily Apple. Zune wasn’t significant to Microsoft’s core business. It had ignored mobile as well for the better part of the decade as it didn’t disturb the Office and Windows PC franchises. But tablets are different. Apple singlehandedly created a new category in 2010 and has dominated it ever since. It is altering the basic notion of computing. Enterprises are dumping their PCs and moving to iPad. We have seen that in our work as well. All of a sudden, there is a direct threat to Microsoft’s core business. This time the implications are very serious. It can no longer afford a misstep. So, instead of letting partners produce mediocre products that have no chance of success in the market, Microsoft is taking the matters in its own hands early on and produce something that on surface looks a pretty compelling product. If it can get the pricing right, it can make a dent and be a contender in the new computing landscape. It can use its products, distribution power, developer ecosystem, and the bank balance to alter the scales. But Apple has a big lead. By the time Surface comes out, Apple would have sold over 100M iPads. If Microsoft executes, maybe there is a chance to not get Zuned Out this time around. If it fails, the company itself might be Zuned Out in due course along with many of its longtime partners.

In the theory of market entry, fast follower is actually a smart strategy. Microsoft was a master at it. However the strategy has its limitations. Against an agile and ruthless competitor like Apple or Google, you better be a really fast follower (Samsung) else time starts to work against you. A slow follower strategy only works if you have something truly innovative (iPhone) or the incumbents are asleep at the switch (Xbox) or the business model is disruptive (Netflix). Also, the fast follower strategy is only sustainable when you are adept at anticipating competitor’s future chess plays.

Shared Data Plans

We have been advocating shared data plans to create more consumer demand for over two years. When I talked to CNBC earlier this year (Jan), I said that in all likelihood the family data plans will be introduced in the US market in 2012. I discussed this more with Bloomberg and USA Today and suggested that most likely Verizon will launch them first. Verizon and AT&T launched the shared data plans this summer with AT&T getting the benefit of launching it second. While it is a great start, to be truly effective, some of the fees need to be reduced or completely eliminated.

Operator’s Dilemma (And Opportunity): The Fourth Curve

While the European operators are feeling the heat from the OTT players (which is further compounded by an abysmal economy), the impact on the US operator revenues hasn’t been significant, yet. Last quarter we released our Mobile Future Forward Research 2012 Paper that took an in-depth look at the evolving landscape. The first of its kind study looks at the revenue curves over the course of the mobile history and discusses the need to invest in the fourth curve. The paper results were discussed in WSJ, The Economist, GigaOM, Seattle Times, and many other fine publications around the globe. The fourth curve will define the fate of many providers. Earlier this year, we discussed the topic in-depth in our Seattle and London forums and we will go even deeper into the subject at our annual brainstorm - Mobile Future Forward on Sept 10th with all major participants.

mCommerce > eCommerce: Mobile First to Mobile Only

In the last couple of years, the realization in the industry set in that mobile is going to reallydominate the world. Very quickly, we are at another pivot point wherein the mobile first doctrine is going to move to mobile only. It is not that the desktop world will disappear into oblivion. Far from it. But, the investments, strategy, and execution will be driven by mobile. As we said in our global research update earlier this year, in 3-5 years, with few exceptions, if a company is not doing majority of its digital business on mobile, it is going to be irrelevant. There are already several data points to support the theory. Leading apps and services like Facebook, Twitter, Pandora are already operating in the world where mobile is driving majority of their user engagement. Expedia, Fandango and others are seeing the early signs of migration into the mobile dominated world. Starting soon we will start to see businesses with mCommerce Revenues > eCommerce Revenues.

Postpaid Doldrums

The prepaid subscriber base exceeded 100M in the US for the first time. As postpaid growth sputters, prepaid is picking up the net-adds. So, the question emerges, where will the net-sub and net-revenue growth going to come from in the next few years. The smartphone penetration in the US is at 50% (excluding M2M), so the significant opportunities are in the upgrades and non-data to data conversion. Family data plans (see above) will help in bolstering data revenues as well. Multiple devices/consumer will increase the sub penetration which is at 110%.

Mobile Data Growth – The Gigabyte Generation

The overall data consumption in the US market in 2012 is expected to exceed 2000 Petabytes or 2 Exabytes. Since the advent of the iPhone five years ago, the US market has seen triple digit growth in mobile data consumption. In 2012, we expect the mobile data growth to be around 80%. This has largely been driven by the introduction of data tiers, the use of WiFi offload, more developer education, throttling in some instances, and some compression and offloading solutions. However, as LTE becomes more widespread in the US, we expect the traffic growth to pick up again.

Market Consolidation

Even though the regulators have indicated their distaste for big mergers, it hasn’t stopped the industry to play the M&A speculation parlor game. Except for a few impossible scenarios, all sorts of deals are being contemplated. The market economics is clearly crying out for more consolidations. The smaller M&As won’t move the needle and bigger M&A are not going to be on the table until we get into a new calendar year.

New Revenue

At the turn of the century, roughly 15% of the service provider revenue came from new subscribers. By the end of the year, we expect this will drop down to 3%. This means that the new revenue will have to come from a) converting non-data to data subs and b) launching new services in different verticals for the existing subs.

Connected Universe, Monetizing Opportunities

While 2011 was the year of figuring what the opportunities are in the new connected era, 2012 is starting to focus on how to monetize those opportunities. That will be the theme of our Mobile Future Forward Thought-leadership summit on Sept 10th. Almost all the vertical industries are benefiting from the connected devices and ubiquity of broadband networks – security, health, retail, utility, transportation, entertainment, and others. We will take a deep dive into the issues, the best case studies, the opportunities, and the players. We are assembling industries who’s who to help you figure out where the industry is headed next.

What to expect in the coming months?

All this has setup an absolutely fascinating 2012 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q2 2012 US wireless data market is:

Service Revenues

The US Wireless data service revenues grew 5% Q/Q and 19% Y/Y to $19.3B in Q2 2012. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.

Verizon and AT&T dominated the quarter accounting for 68% of the mobile data services revenue and had 66% of the subscription base.

The Overall ARPU declined by $0.03. Average voice ARPU declined by $0.63 while the average data ARPU grew by $0.60 or 3% Q/Q.

The average industry percentage contribution of data to overall ARPU is now at the 42% mark in Q2 2012 and is likely to exceed the 50% mark early next year. All the top three US operators are above the 40% mark with Verizon leading the trio. (For reference, all three major Japanese operators are now over the 60% mark).

Subscribers

The US operators bounced back from its first ever decline and added 400K postpaid subs.

T-Mobile’s postpaid woes continued for the eight straight quarters.

AT&T and Verizon both added more than a 1 M subs while Sprint added 283K.

For the eleventh straight quarter, AT&T reported more net-adds from connected devices than postpaid subs.

Applications and Services

While many of its brethren are seeing messaging volume declines, messaging in the US market grew by 5% YOY and 1% Q/Q. US consumers are now sending messages at the rate of 696 messages/sub/mo. However, most operators are seeing decline in messaging revenue growth due to IP messaging. As expected, this transition will continue around the world at different rates. In the US, while the change is underway, we don’t expect any dramatic declines like in Philippines or the Netherlands in the near-term.

The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education.

Q2 2012 again saw tremendous activity in the mobile commerce and payments space with a lot of announcements from the operators, Internet players, and startups as well as the retailers and the ecommerce players. All are vying for a piece of the mobile wallet. Much more to come in the next 12 months. On the retail side, Starbucks is a player to watch as it tries to become a more active participant in the digital ecosystem.

Handsets

Smartphones continued to be sold at a brisk pace accounting to over 70% of the devices sold in Q2 2012 with Android dominating though iPhone leads in revenue and mindshare.

Samsung now leads in every major unit sale category both on the world stage as well as in the US. However, profits are a different equation where Apple overshadows its rivals like Gulliver on the Lilliput land.

While it is fairly clear that Windows will acquire the #3 spot behind iOS and Android, the journey to a substantial and competitive market share is still ways off. It renews its entry into the battlefield with Windows 8 next quarter.

Apple’s iPhone sales declined in Q2 but with iPhone 5 round the corner, it is all set to dominate the remainder of the calendar year.

US continues to sell over 40% of the world’s smartphone every quarter thus making it the most attractive market for OEMs.

AT&T continues to dominate the connected devices segment with over 47% market share.

Verizon continues to sell more LTE smartphones as it added another 3.2M subs in Q2 2012 making it the leading LTE operator in the world. AT&T’s and Sprint’s LTE rollouts are gathering steam. T-Mobile announced that it is putting the cash and spectrum it got from AT&T to good use and deploying LTE by 2013. Expect the “fastest network” marketing to continue for at least another seven quarters.

There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling roughly 47% of the iPhones in the US. However, iPhone sales in the US declined as consumers await iPhone 5. T-Mobile’s date with Apple is starting to look like a possibility in the near future.

Mobile Data Growth

The overall data consumption in the US market in 2012 is expected to exceed 2000 Petabytes or 2 Exabytes. The smartphone data consumption at some operators is averaging close to 850 MB/mo. As we move into 1GB range along with the family data plans kicking in, you can expect the data tiers to get bigger both in GBs and dollar amount.

The Signaling traffic has increased 3x.

Mobile data traffic growth is likely to slow down to roughly 80% after doubling for the last five years. Voice traffic will dip below 10% of the overall traffic in 2012.

While the spectrum debate rages on, in addition to the network and backhaul upgrades, policy management and data offload have emerged as top two solutions that operators deploying around the world. Signaling management solutions like Diameter routing are also getting good traction. However, a long-term video solution is still elusive. As we have been saying in our Yottabyte series of research papers, a comprehensive solution strategy is needed to effectively manage margins/bit.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Nov 2012. The next Global Wireless Data Market update will be issued in Oct 2012.

Disclaimer: Some of the companies mentioned in this paper are our clients.

We started doing Mobile Breakfast Series in Seattle back in 2009 and after hosting10 straight events, it was time to expand the wings and explore other cities. The first stop in this journey was Atlanta and we worked closely with our partners at “Wireless Technology Forum” to make it a successful event last friday. I also had the good fortune of participating in WTF’s event the night before. Both events focused on Connected Devices and their impact on the consumer, the ecosystem and the value-chains thus making it a “connected week” in Atlanta.

As I mentioned, the night before the event, I had the opportunity to present and moderate a panel on Connected Devices with Glenn Lurie, President of Emerging Enterprises at AT&T and Jeff Smith, CTO at Numerex. Both are movers and shakers in the space and it was such a pleasure meeting with many WTF members and interacting with the top-notch panelists. The event was recorded and is available on WTF’s Youtube Channel.

We hosted the Atlanta Mobile Breakfast Series Event in Atlanta at the Commerce Club of Atlanta which has beautiful views of the Atlanta area.

There is an old Chinese saying, “When the wind of change blows, some build walls others build windmills.” Our industry is going through tremendous change; it won’t be an exaggeration if I say that the tectonic plates are moving and moving fast. The motion is being forced both by the economic conditions but also the technology and business progress. I have been around the industry long enough but it still amazes me – the stuff that’s in the pipeline and how quickly consumers absorb it.

The topic of our discussion was Connected Devices, the Cloud, and the Consumer. With connected devices, I am referring to the broad availability of devices that are connected to data networks – so they include smartphones, tablets, connected auto but also wellness devices like fitbit, energy meters, dog collars, medical devices, etc. as of last year, the subscription penetration was at 6B, next year, we will have more connections than people on this planet. In another 5-7 years, we might touch 20 Billion sensors on the planet. So you can see the growth is going to be astronomical.

Another phenomenon is that of cloud. If a startup mentions Cloud in their presentation to a VC, the valuation doubles, you say mobile, and it quadruples. I don’t know how many of you are a fan of Mark Weisier, the Xerox Parc researcher who pioneered what became “always on, always connected” tagline of pervasive computing. It was more than 20 years ago, we finally are seeing that with the help of broadband networks, amazing devices, and open business models, information is truly available at the fingertips.

The third leg of our discussion was the consumer – their appetite for new and the latest is creating this tremendous opportunity that is shaping their behavior and expectations.

We had an awesome panel to discuss things in detail. First I discussed the topic with David Christopher, Chief Marketing Officer at AT&T Mobility. As most of you might be aware, AT&T is leading not only the US but the globe in their efforts to bring connected solutions to the market. I work around the world with top operators, and I can tell you there is no exciting place in mobile right now than right here in the US of A. US is leading in innovation, technology, and business model. We had lost touch after 1G and US truly teaching rest of the world how to do 4G right. David has a terrific background – a product and operationally driven CMO at one of the world’s biggest mobile operator and it was a delight to have him on the panel.

I have known both Biju Nair and Louis Gump for sometime – several decades of mobile expertise. Louis is with CNN, has been running their mobile efforts which are top-notch. He is a recognized leader in the mobile advertising space and given that CNN’s properties span across multiple screens, he has really great insights as to how consumers behave across n-screens.

Biju is a hard core technologist, has been working at solutions that make Louis’ stuff work across networks and devices. Many of you might not know but Synchronoss where Biju is the Chief Strategy Officer and Products EVP, powers online activation at AT&T. If you bought the iPhone over the last few years at AT&T, there is a good chance your order was processed by Synchronoss.

Highlights from the discussion below:

Many in the industry expected AT&T to take a hit after the iPhone exclusivity ended but AT&T continued to perform better than Verizon and others with devices. David has been the person leading the charge to ensure AT&T maintains its competitiveness. AT&T did that by a) conveying the overall value proposition of an iPhone on the AT&T network b) build out the Android portfolio and c) conveying crisply the benefits of being an iPhone on the AT&T network (talk and text at the same time, etc.)

Consumers understand that 4G is faster than 3G but necessarily understand (beyond the techie crowd) the benefits of LTE.

AT&T is a big supporter of Windows ecosystem. It is good to have more choice for the consumers. While the initial version of Surface is WiFi only, the hope are high for Windows 8. Having a viable third ecosystem for mobile is important for the mobile industry.

Microsoft has done a good job with the design of the OS but have been poor on the opening up of the API front. Developers find the closed ecosystem to be stifling. Unless Microsoft remedies that, interest in the platform might be limited.

It is RIM’s battle to lose. They have good software, loyal users, security framework, email is the best but have been asleep on the wheel for a while. They can turn things around though the probability of that happening are fairly low at this point.

AT&T is studying data share plans and how consumers might react to them. It is a new paradigm in the evolution of mobile data plans and services.

CNN has been doing mobile for a long time but was surprised by the pick up of the tablets. The reach is highest on the browser for them but the engagement is much higher on apps.

Cloud is essentially Client-Server from the years past but applied to new use cases that brings together user experience new and different ways. The trifecta of devices, broadband networks, and content is enabling new services.

Privacy and Security of cloud services is of paramount importance. There is a view that the industry needs to self-regulate and come up with some better solutions quickly.

HTML5 is an important step for the industry but it is clearly not a panacea. It will have a role in the ecosystem but won’t obliterate the need for apps. The holy wars to continue.

There is some conflict between the cloud data usage and data tier plans but WiFi (US consumers have access to WiFi 80% of the time) and smarter configuration to manage data have helped.

Mobile advertising only 1% of the overall mix but mobile has 10% usage so a tremendous growth opportunity (yep, we said that back in 2007).

APIs are open but monetization is still challenging. The first task is to get developers understand the benefits and find ways to enhance the user experience.

Toll free data plans is not a new concept. Remember Sugar Mama from Virgin Mobile from years ago? Still experimental. Content providers like CNN are willing to engage if there is some value exchange that yields to revenue which can be shared. Some interesting opportunities with prepaid.

To some extent there is more ARPU innovation in the developing countries like India which are borne out of necessity – like the Kissan program in India.

In terms of what’s next, virtually every industry is going to be disrupted. Tremendous change on the horizon however a lot will depend on the battery innovation in the coming days and months.

The team at Chetan Sharma Consulting really enjoyed taking the Breakfast Series to Atlanta. My thanks to the terrific team at WTF for their support and to the Atlanta Mobile Community for making the event so successful. Finally, the event wouldn’t have been possible without the support of our series partner – Synchronoss.

Operator traditional revenue streams are under threat esp. voice and messaging. Access margins will continue to stay under pressure. OTT players are coming in fast and furious and it is not just the big ones like Google but also players like Whatsapp, Voxer, Viber and others. How do operators play in the new landscape – lessen the decline of their traditional revenues while investing in new areas that improve their overall margins and revenues. Do they play the role of an enabler, a utility player, or become the OTT player themselves? In a software-driven world, how do they stay nimble? On the flip side, what are some things that operators can provide to the OTT players that make them successful, take them to the market quickly and maintain a long-term healthy and mutually-beneficial partnership? Operators still generate 70% of the global mobile industry revenues, so they are an important part of the chain but how do they ensure they have an equally relevant share in the profits. The panel will discuss how operators and OTT players think about the challenges and the opportunities, the competition and the coopetition.

June is the Mobile Breakfast Series Month with 3 programs planned in 3 cities across 2 continents. We kicked things off with the first one earlier today in Seattle. The topic of discussion was Operators and OTT – The Way Forward.

There is an old Chinese saying, “When the wind of change blows, some build walls others build windmills” Our industry is going through tremendous change; it won’t be an exaggeration if I say that the tectonic plates are moving, in some places quite violently. The motion is being forced both by the economic conditions but also by the technology and business progress. I have been around the industry long enough but it still amazes me – the stuff that’s in the pipeline and how quickly consumers absorb it.

The topic of our discussion was Operators and OTT or Over the Top. These are services like Skype, Youtube, Amazon video, HBO, etc. things that go over the network. I wanted to broaden the discussion to another acronym – VAS or value added services – both for the consumer segment and the enterprise segment. These will be simple things like address backup or CRM applications to more sophisticated supply chain management, in-store location targeting, advertising etc. To discuss this we have an absolutely brilliant panel representing various parts of the value chain.

RealNetworks has been the Kevin Bacon of startups in Seattle. Thanks to the people Rob Glaser hired, RN has done a better job at spawning up new ideas that your bigger cousins in town. Rob is well known for his pioneering work in giving Internet its voice (in the words of Kara Swisher in the 1998 article for WSJ). But lately, Rob has been busy with Sidecar – a next generation communication app that does more things than messaging and voice. If you haven’t tried, please do so.

Mary Jesse is one of the most distinguished engineers in WA State going back from the McCaw days, VP of Eng at AT&T, CTO of RadioFrame and now CoFounder and CEO of an enterprise communications company called Ivytalk. Again, if you haven’t tried it out, please do so.

Michael Shim was with Yahoo before Groupon and Yahoo was one of the true pioneers in the mobile space and now at Groupon he is seeing the new opportunities on the VAS, payments, and commerce. It will be great to get his view of how Groupon thinks about the space.

Have you tried T-Mobile’s Bobsled? Well, Alex Samano is the man and energy behind this service and T-Mobile is one of the few operators globally who are taking this OTT opportunity head-on. At TMO, he has been involved some really interesting initiatives like @home and wifi calling.

Last but not the least, Abhi Ingle from AT&T who heads up the mobile enterprise business. The industry has been talking about enterprise mobility for ages but his team generates more revenue than majority of the industry players combined. Did you know that AT&T is one of the biggest app developer on the planet? I bet you didn’t know that.

Operator traditional revenue streams are under threat esp. voice and messaging. Access margins will continue to stay under pressure. OTT players are coming in fast and furious and it is not just the big ones like Google but also players like Whatsapp, Voxer, Viber and others. How do operators play in the new landscape – lessen the decline of their traditional revenues while investing in new areas that improve their overall margins and revenues. Do they play the role of an enabler, a utility player, or become the OTT player themselves? In a software-driven world, how do they stay nimble? On the flip side, what are some things that operators can provide to the OTT players that make them successful, take them to the market quickly and maintain a long-term healthy and mutually-beneficial partnership? Operators still generate 70% of the global mobile industry revenues, so they are an important part of the chain but how do they ensure they have an equally relevant share in the profits. The panel discussed how operators and OTT players think about the challenges and the opportunities, the competition and the coopetition.

Some highlights from the discussion:

You have heard it before, but Apple really changed the game. It allowed for the OTT players to be born and thrive. iPhone drove the networks to adopt faster and better technologies over a span of 4-5 years and the world changed as a result.

The capabilities that are available in an robust IP environment are leading to tremendous opportunities around the ecosystem.

Groupon drives 30% of its business from mobile. If the payments/commerce piece was more seamless, this could be much higher.

Groupon thinks that if the consumer data is productized by the operators, there are some big opportunities that players like Groupon can take advantage of.

There is significantly more cooperation with the operators in the developing world as the Groupon brand is not well known and the operator channel is great for distribution.

For AT&T, 65% of the postpaid base is using smartphones, 80% of the new devices sold to this group is now smartphones. Changing the landscape pretty dramatically.

Web 3.0 is Mobile Internet.

App providers and Operators have natural tension because they want to compete for the same set of communication features/functionality. However, for some apps like Sidecar cooperation is must because of the QoS issues. While it is hard to do things simultaneously with all the operators, things can be achieved working 1-2 carriers at a time.

To some extent the story is repeating itself, operators used to be in the hardware business but Apple and Samsung rule segment now. Things always change, who knows what the next cycle will bring.

We are just at the start of a phenomenal run that will dwarf the achievements of the past. Like I say, more changes in the next 10 years than in the last 100 years.

Collectively, operators need a better strategy for opening APIs to startups. Currently, they find it tedious and time consuming.

Bobsled user base is growing fast but the contrast to other OTT players is stark. The scale is different because they are driven by different performance metrics. At the end of the day, Operators have to show revenues while OTT players are going after the audience and then worry about revenues later. It is obvious, many of the communication OTT providers won’t succeed, a few will reach the next level but this forces the marketplace to shrink and more players to go after that pie.

RCS has been talked about since 2007 but it has taken 5 years for the functionality to come to market from limited number of operators on limited number of handsets. That’s the dilemma for the operators. While interoperability is important and desired, the rate of time-to-market is more important.

Operators have started to offer cross carrier services for messaging, location APIs and others which will help the ecosystem.

Operators and OTT players will have to settle into a more collaborative approach to reach new heights of service and application deployment.

There was an agreement that too much is made out of the Operators vs. OTT trash talk and there are more synergies than there are differences in overall objectives to make the consumer experience better.

In April 2012, in its report on Intellectual Property, the US Patent Office (USPTO) concluded that the entire US economy relies on some form of IP, because virtually every industry either produces or uses it. The foreword of the report said,

“Innovation protected by IP rights is key to creating new jobs and growing exports. Innovation has a positive pervasive effect on the entire economy, and its benefits flow both upstream and downstream to every sector of the U.S. economy. Intellectual property is not just the final product of workers and companies—every job in some way, produces, supplies, consumes or relies on innovation, creativity, and commercial distinctiveness. Protecting our ideas and IP promotes innovative, open, and competitive markets, and helps ensure that the U.S. private sector remains America’s innovation engine.”

Intellectual property has been an integral part of the economic engine of the western world for many decades if not centuries. Over the past two decades, nations and corporations have competed on the creation, funding, execution, and protection of the new ideas. Increasingly, the role of mobile devices, networks, and applications has become an important component of the growth story worldwide.

To say that the mobile devices have become the remote control of our lives would be an understatement. Mobile phones stay attached to us almost 24 hours a day. From waking us up in the morning to keeping us connected and entertained, from speeding up a commerce transaction to being a trusted advisor; mobile is fundamentally changed how we as consumers behave and how societies and cultures evolve over time. As a result, there has been a big influx of investment and innovation over the last decade. This surge of activity has also translated into increased number of patent filings in the two major jurisdictions of US and Europe. Even the developing countries like China and India have seen a significant increase in patent activity in the country. In fact, in terms of filings, China’s share of the global patent grants has increased from 0.8% in 1996 to 15% in 2010 placing it third behind Japan and the US and well ahead of Korea and Europe.

According to the US Patent Office (USPTO), in 2011, the number of applications reached over 535,000 growing by almost 54% from a decade ago. Similarly, the number of patents granted grew 35% to 224,505 by the end of 2011. The numbers of foreign filings are now in the majority for both the applications filed as well as the patents granted. In Europe, similar trends were observed where the EPO (European Patent Office) patent grants increased by 46%.

The number of mobile related patents that were granted by the USPTO and the EPO increased significantly over the course of last decade. The US market saw a 390% increase while the European market saw a 173% increase in mobile related patent grants.

Another interesting fact is that as of Q1 2012, over 21% of the patents granted by the USPTO now are mobile related. This grew from around 2% in 1991 and 5% in 2011. In Europe, roughly 9% of the patents granted are related to mobile.

Chetan Sharma Consulting analyzed almost 7 million patents granted by the USPTO and EPO over the last two decades to understand how mobile has become a key enabler for all technology companies. Furthermore, we looked at patent granted to the top 65 technology companies who are active in the mobile space to understand their relative strengths and weaknesses in the mobile patent landscape. In a first of its kind study, the paper presents and discusses these findings in more detail.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in May 2012. The next Global Wireless Data Market update will be issued in Apr 2012.

Disclaimer: Some of the companies mentioned in this paper are our clients.

The US market generated $67 billion in mobile data revenues in 2011 accounting for 39% of the overall revenues for the country. The mobile data market grew 4% Q/Q and 19% Y/Y to reach $18.6B for the quarter. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.

The US market accounts for 5% of the subscriber base but 17% of the global service revenues and 21% of the global mobile data revenues. It also accounts for 40% for the global smartphone sales.

If the Martians landed on earth in early 2012, they will conclude the following: there are only 3 things certain on earth – death, taxes, and the direction of Apple’s stock price. Apple had a monster quarter with record sales of iPhone and iPad not only in the US but also around the world. Apple sold over 93M smartphones outpacing its nearest rival Samsung by a good distance. Its share of the profits is more than rest of the OEMs combined. Its stratospheric rise is legendary by any measure. Today Apple eclipsed the combined market cap of Microsoft, Google, and Amazon. Think about that for a minute. In 6-12 months, you could probably add Facebook to the equation as well. The question on rivals’ mind is when will Apple stop defying gravity. Until then, better be a fast follower.

Smartphones continued to be sold at a brisk pace accounting for 65% of the devices sold in Q4 2011. US Operators are averaging 80% of their postpaid sales as smartphones with Android dominating though iPhone leads in mindshare. The Obama administration formally placed featurephones on the endangered species list but either chamber is unlikely to pass any resolution to save it.

Nokia launched its Lumia series of devices with good acclaim however it remains to be seen if it will be able to win back the customers in big numbers in 2012.

The Post-PC Era

Ever since the iPad came into being, the chants of the post-pc mantra are getting louder. But what is it? Is it just the untethered devices? Isn’t iPad a person computer too? What about the smartphones? They have more horse power than my first few PCs combined. Is the personal computing morphing into something else or is there a clear delineation between the Mesozoic era and the new tomorrow? While we in the industry get obsessed by these minutiae, what do the real consumers think about it? Clearly, tablets are selling better than the PCs (as our previous research has shown) both in units as well as the revenue. But so did the laptops compared to the desktops.

So, does the miniaturization of a screen and improving computing power represents a big shift or is this just an evolution of personal computing. Consumers rarely think about what computing era they are in. Between the time they wake and go back to bed at night, there are a series of tasks they have to accomplish. The technology is their companion to accomplish them, from keeping calendars to creating corporate presentations to sending messages to watching TV for entertainment to socializing with family and friends.. the list seems endless. Often times, the time is too short. Technology finds a way to give the time back to us by reducing the distance between the tasks as well as compressing the duration.

As I have said before, nothing collapses time and distance like mobile. Tablets, particularly, iPad and the smartphones, if seen through the eyes of the year 2000 make us superhumans providing us capability to process several tasks in parallel. We can even direct the computing device to figure things out while we sleep. Computing is morphing into a true companion, a wily butler who just knows what’s needed next. Being untethered to a desk makes us more productive. Taking the computing evolution further – what if we can create a desktop environment wherever we are instead going to a desk. For my work setup, I have 4 or 5 screens running at the same time and it does help. It is hard to see tablets in their current incarnation competing with that task environment. However, it does allow us to collapse the desktop and take it with us.

Tablet+Network+Cloud is an enormously powerful value proposition. It should be noted that apps and services on the mobile platform are defining the desktop environment now.

For the enterprise worker, many of the day-to-day tasks don’t really need the real-estate of 3 big monitors; we can easily accomplish a lot with a smartphone or better yet the tablet. As such, we are seeing corporations de-investing in desktops and laptops and moving this investment into tablets, smartphones, apps and make their work force more nimble and competitive. This also means, apps that used to be written for Windows will be predominantly written on iOS and Android, at least for the near-term. Microsoft has a strong offering in 8 and the fact that it will work across the three screens gives it some chips to play in the new world. Whether we call it a post-pc era or the computing continuum doesn’t seem that relevant. What matters most is the set of tools that help us accomplish the tasks at hand on a daily basis. The shift is tectonic in nature, and it is creating winners and losers at an incredibly fast pace. However, my sense is that we are finally entering into the ambient computing era where the computing capability is all around us, something that Mark Weiser of Xerox PARC envisioned more than 20 years ago and something we imagined growing up with the original Star Trek.

We will be dealing with multiple connected devices which share a common identity, cloud, media, security layer, and most importantly the apps and services. The traditional PC won’t disappear but our reliance on one single machine for creation or consumption will continue to dissipate. We will have scores of radios around us, multiple objects that can think and communicate from cereal boxes to security alarms; from windows to fabric shirts; from tables to automobiles; it feels more like the connected era - where objects with brains and energy are connected to create an unprecedented universe of intelligence and productivity. This will indeed impact purchasing behavior and the commerce flow. The social and computing interactions are more intimate, have more purpose, and are available everywhere. The work-life boundaries only exist in one’s mind. A business can be started with an app on a smartphone, anywhere serving to any consumer on the planet. The impact on productivity, the shrinking human capital needed for a set of tasks, corporate and nation’s competitiveness is significant.

In many developing nations, the PC era never arrived. They jumped right into the mobile computing era. They have always lived in the post-PC era. The implications are profound.

More than anything else, the old guard is having a tough time adjusting to the new computing paradigm. HP, Dell, and others have tried but failed thus far to either launch a decent tablet or a smartphone. While Apple invented the new computing paradigm only Samsung has been able to stand up as a worthy rival. The success of a vertically integrated success strategy has seduced Microsoft and Google to the doorstep of a vertical strategy. Will they cross the chasm remains to be seen. Much depends on how Nokia performs for Microsoft and how long can Android juggernaut keeps growing for Google. Then, of course, there are Amazon and Facebook who are attacking the market from a services angle. With a strong entry of the likes of Huawei and ZTE, players caught in the middle are struggling for a viable long-term path to success.

The engagement model with the computing resources is undergoing significant evolution as well. Keyboard and mouse seem relics of a bygone era. We are falling in love with gesture computing combined with a myriad of input and intelligence techniques. Data processing at the speed of light is the new competitive advantage at all computing layers.

In every shift, winners and losers are created. The ones who fail to recognize and adapt become the relic of the historical past duly replaced by the new creators and implementers. If we look at the US household IT spend, over 50% of that spend now goes to mobile. The life time value will increase for players who can tie experiences together across multiple screens in a seamless fashion. This will enable them to not only capture the device revenue but also the commerce and services revenue built on top of it.

The battle for the consumer wallet is being fought on Apple’s turf; it is the one driving the industry narrative and the agenda for its competitors and the ecosystem at large. Am pretty sure we will stop using computer to define computing. Interesting times indeed.

Competition

In any other year, the AT&T and T-Mobile merger would have likely gone through. The interconnection of policy, politics, and private enterprise was on vivid display last year. The failure of the merger forced Deutsche Telekom to resort to the only second viable option - to take the plunge and invest in the US market. Whether 4 competitors can survive 3 years from now is still questionable. Given that DOJ and FCC have set the precedent, the only way a major M&A can take place in the US service provider segment in the near term is if one of the tier 2 operators falters Q/Q. We still believe in our thesis as outlined in our research paper “Competition and the Evolution of Mobile Markets” last year that the US market can’t support 4 large operators and we are likely to see further M&A activity in the sector before too long.

Mobile Data Growth – The Gigabyte Generation

Mobile data traffic growth continued unabated doubling again for the 8th straight year. We expect the mobile consumption to double again in 2012. Data now constitutes over 85% of the mobile traffic in the US. Approximately 30% of the smartphone users average more than 1GB/mo. As new devices and new network technology roll-out keep pace in 2012, the data traffic will grow at the expected pace. The signaling traffic is expected to grow in even faster. Stay tuned for our research paper in the Yottabyte series of papers on the topic later this year.

Mobile Patents Landscape

2011 was the most active year for mobile patents in terms of disputes. All the major players were active in filing and protecting their turf for the future battles. IBM topped the industry in the most number of mobile patents granted in 2011 in the US followed by Samsung and Microsoft. The rest of the top 10 in order included Sony, Qualcomm, LG, Ericsson, Panasonic, Broadcom and RIM. Of the major players, Nokia occupied #12, Intel #13, Apple #16, Motorola #21, and Google #23 spot in the top 50 ranking. Amongst the mobile operators, Sprint was the leader with 323 patents granted in 2011. We have more research coming out later in the year that shows the relative patent strength of the various mobile players.

Connected Universe, Monetizing Opportunities

While 2011 was the year of figuring what the opportunities are in the new connected era, 2012 is starting to focus on how to monetize those opportunities. That will be the theme of our Mobile Future Forward Thought-leadership summit in Sept. More details to come. Almost all the vertical industries are benefiting from the connected devices and ubiquity of broadband networks – security, health, retail, utility, transportation, entertainment, and others. We will take a deep dive into the issues, the best case studies, the opportunities, and the players.

What to expect in the coming months?

All this has setup an absolutely fascinating 2012 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q4 2011 and full year 2011 US wireless data market is:

Service Revenues

The US Wireless data service revenues grew 5% Q/Q and 19% Y/Y to $17.6B in Q4 2011. The mobile data services revenues for the US market hit our initial estimate of $67B for the year 2011, a growth of 22% over 2010. For the year 2012, we are forecasting that mobile data revenues in the US market will reach $80 billion.

Verizon and AT&T dominated the year accounting for 68% of the mobile data services revenue and had 66% of the subscription base.

Verizon maintained its #1 ranking in 2011 ahead of NTT DoCoMo with a whopping $23.7B mobile data year. AT&T maintained its #3 position with $22B in data revenues. Sprint and T-Mobile maintained their #5 and #9 rank in the top 10 mobile data operators list for 2011.

ARPU

The Overall ARPU declined by $0.43. Average voice ARPU declined by $0.96 while the average data ARPU grew by $0.52 or 3% Q/Q.

The average industry percentage contribution of data to overall ARPU was 38.9% in Q4 2011 and is likely to exceed 40% by Q1 2012. Now, all the top three US operators are above the 40% mark with Verizon leading the trio. (For reference, all three major Japanese operators are now above the 55% mark).

We expect data revenues to exceed voice revenues in the US market in early 2013.

Subscribers

At the end of 2011, the mobile penetration in the US stood at approximately 110%.

Helped by the growth in connected devices, the overall net-adds increased by 5.1M with AT&T accounting for almost 50% of the growth. For the year, AT&T was a clear leader in net-adds primarily driven by the success in the emerging devices segment. Despite losing the iPhone exclusivity, the operator was able to maintain solid growth throughout the year.

Verizon led in postpaid net-adds.

For the ninth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. AT&T now accounts for 43% of connected devices in the US (w/ cellular subscription of some sort).

Overall, AT&T has 46% of the connected device share of the market. The connected device segment growth slowed down to 4% Q/Q but is still up 27% Y/Y.

Sprint added more than a million subscriptions for the fifth straight quarter while T-Mobile subscriber woes continued as it lost 569K subscriptions. T-Mobile’s postpaid growth has been especially troubling as it doubled its postpaid net-losses to 2.2M for the calendar year.

Rebounding from the failed AT&T merger, Deutsche Telekom announced its investment in the US arm. T-Mobile will launch its LTE in 2013 in its attempt to catch-up with its stronger rivals.

Applications and Services

After unseating Philippines as the king of TXT messaging earlier in the year, US TXT messaging continues to grow albeit at a slower pace. US consumers are now sending messages at the rate of 680 messages/sub/mo. Most operators are seeing decline in messaging growth due to IP messaging. As expected, this transition will continue around the world at different rates. In the US, while the change is underway, we don’t expect any dramatic declines like in Philippines or the Netherlands in the near-term.

The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education.

Q4 2011 again saw tremendous activity in the mobile commerce and payments space with lot of announcements from the operators, Internet players, and startups as well as the retailers and the ecommerce players. All are vying for a piece of the mobile wallet. Much more to come in the next 12 months.

Handsets

Smartphones continued to be sold at a brisk pace accounting for 65% of the devices sold in Q4 2011. Operators are averaging 80% of their postpaid sales as smartphones with Android dominating though iPhone leads in revenue and mindshare.

Nokia’s position in the market improved slightly with the launch of WP7 devices. While it is fairly clear that Windows will acquire the #3 spot behind iOS and Android, the journey to a substantial and competitive market share is still ways off.

Apple had a monster Q4 with 37M iPhones sold and recaptured its global smartphone leader title from Samsung though the Korean rival bested it in the US market albeit barely.

40% of all smartphones sold globally in Q4 were sold in the US making it the most attractive market for the OEMs.

Smartphones now account for over 80% revenue of all phones sold in the US.

90% of the tablets use WiFi only (some have inactivated cellular chipset) meaning the operator channel is not a necessary distribution channel. Operators who start to bundle multiple devices by single data plans and data buckets are going to see a better yield in this category. We expect family data plans to be introduced in the US market soon.

Verizon added another 2.2M LTE subscribers making it the leading LTE operator in the world. AT&T’s LTE plans are gathering steam and Sprint plans to offer LTE in 2012.

There is always a beauty contest amongst operators as to who sold more iPhones. AT&T again bested its rivals by selling a whopping 7.6M units in the quarter more than Verizon and Sprint combined. T-Mobile is still waiting for its date with Apple.

Mobile Data Growth

Mobile data traffic growth continued unabated doubling again for the 8th straight year. We expect the mobile consumption to double again in 2012. Data now constitutes over 85% of the mobile traffic in the US.

While the spectrum debate rages on, in addition to the network and backhaul upgrades, policy management and data offload have emerged as top two solutions that operators deploying around the world. Signaling management solutions like Diameter routing are also getting good traction. However, a long-term video solution is still elusive. As we have been saying in our Yottabyte series of research papers, a comprehensive solution strategy is needed to effectively manage margins/bit.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in May 2012. The next Global Wireless Data Market update will be issued in Apr 2012.

Disclaimer: Some of the companies mentioned in this paper are our clients.

First things first. From all of us at Chetan Sharma Consulting, we wish you and yours a very happy, healthy, and prosperous 2012. My thanks to all who participated in our 2012 Mobile Predictions Annual Survey. It gives our community an insider’s view of trends.

2011 was a terrific year for the mobile industry. With all its ups and down, consumers embraced devices, applications, services, and technology with more gusto than ever before. In the waning hours of 2011, we crossed the 6 billion subscriptions milestone. While the first billion took 19 years, this last billion only took 15 months.

Smartphones are selling like hot cakes. We estimate that by the end of Q4 2011, over 60% of the devices sold in the US were smartphones and over 30% of the global sales were for the evolved brethren of the primordial featurephones. Sparked by insatiable consumer demand for mobile data, LTE and HSPA+ networks are sprouting all over the planet with US leading the charge for broadband deployment.

Our annual survey is a way for us to engage our community on the trends for the next year. We put some of the pressing questions to our colleagues and industry leaders. We are able to glean some valuable insights from their choices and comments, some tangible shifts, and get a sense of what’s to come. Executives, developers, and insiders (n=150) from leading mobile companies and startups from across the value chain and around the world participated to help see what 2012 might bring to keep us on our toes. What makes this survey unique is that it draws upon the collective wisdom of folks who are at the center of the mobile evolution.

Fifteen names were randomly drawn for the limited edition of the Mobile Future Forward 2011 book. The winners are:

Tor Bjorn Minde, Head of Ericsson Labs, Ericsson

Sunder Somasundaram, Industry Solutions Practice Director, AT&T

C. Enrique Ortiz, Mobile Technologist, About Mobility

Russell Buckley, CMO, Eagle Eye

Marianne Marck, VP – Engineering, Starbucks

John Foster, President, ZED USA

Angel Luis Saez, Sr. Director, Orange Spain

Dilip Mistry, Senior Director, Microsoft Asia

Phyllis Reuther, Advanced Analytics Lab, Sprint

Gene Keenan, VP of Mobile, Isobar

Elizabeth Day, Director of Finance, Trilogy International

Alan Cole, Research Staff Member, IBM T.J. Watson Research Center

X J Wang, VP – GM China, Vesta Corp

Michelle Lee, Director, SK Telecom

Hemant Chandak, Sr. Analyst, Cisco Systems

Thanks again to everyone who contributed. We will be calling on you again next year. It has been a terrific year for us at Chetan Sharma Consulting and we are looking forward to an engaging and productive 2012.

Be well, do good work, and stay in touch.

Thanks and with warm wishes,

Your feedback is always welcome.

Thanks

Chetan Sharma

Now onto the 2012 Mobile Industry Predictions Survey Results.

1. What was most newsworthy in Mobile 2011?

Android had a spectacular rise in 2011 around the globe. Android OEMs collectively shipped the most number of devices and while margins shrank, they were able to put a united front to iOS. 2011 will always be remembered for the passing away of the industry transformer Steve Jobs. His work directly or indirectly touched billions of souls around the planet, many times over – something rarest of human beings are able to achieve in their life time. Regulatory tussles and significant increase in IP disputes also occupied the headlines. Amazon announced its intention for the mobile space with the launch of Kindle Fire.

2. What will be the biggest mobile stories of 2012?

As we look towards 2012, our panel voted for the continued growth of mobile data as the biggest story followed by Amazon’s entry into the mobile space. Some key questions for the year are: Will Microsoft/Nokia devices will make any meaningful progress? Will RIM survive the year? How does Google manage the fragmentation, decline in margins (for the OEMs), and the IP issues? Will any high-profile security and privacy mishaps lead to more regulatory entanglements? Facebook IPO and its mobile ambitions? How do operators manage the data demand? Which M&As will capture industry’s attention? Will Apple continue to dominate on both smartphone and tablet front? What does Apple do with mobile payments? and much more. Clearly, it is going to be a terrific year.

3. Who will be the most open player in the mobile ecosystem in 2012?

File this in the “perception is reality” folder. Despite all the criticism, Google has maintained its strong position as the most open player in the mobile industry.

4. What applications will define 4G?

Still looking for a killer-4G app? Video, cloud computing, and access will continue to drive 4G demand and growth.

5. What will be the breakthrough category in mobile in 2012?

For a second year in a row, the panel voted for mobile payments and mobile commerce as the top two category that will find their voice. Mobile advertising has become mainstream so it lost its ranking in the top 3.

6. What will be the most popular consumer mobile applications in 2012?

Apps preferences vary by regions depending on a whole range of factors. Messaging and Commerce are the top two categories for the developing world while consumers in the developed nations are likely to gravitate towards commerce and location based services.

7. Which will be the most dominant (unit sales) tablet platform in 2 years?

iOS and Android will dominate the tablet landscape for the next 24 months. A late entry by Windows 8 tablets could make a dent but don’t count on it.

8. Who will make the biggest mobile acquisition in 2012?

2011 had its fair share of block-buster acquisitions, some successful while others were not. Our panel expects Microsoft and Google to continue making the biggest acquisitions.

9. How will the "Apps vs. Mobile Web" debate shape up in 2012?

It seems like the pendulum is swinging towards the mobile web though hybrid solutions are likely to stay with us for a long time.

10. Who will define the mobile payment/commerce space?

The financial companies safely locked in the mobile payments space and while the value chain is fairly complicated and definition confusion abounds, the likes of Visa, Operators and Google will continue to drive the payments/commerce space.

11. Which solutions will gain the most traction for managing mobile data broadband consumption?

Managing data growth and margins drives all strategies at mobile operators these days which in turns drives the value chain. 4G, tiered pricing, and mobile offload continue to be the top solutions if one has the spectrum that is.

12. Which category will generate the most mobile data revenue in 2012?

Messaging, access, apps, and advertising are the four broad categories that drive mobile data revenues around the world. The developing markets rely on messaging while the developed markets are increasingly looking to access as their dominant form of revenue generation.

13. What will help mobile cloud computing gain traction in 2012?

Mobile cloud computing will continue to be defined by enterprise, storage, and media needs.

14. Which enterprise segment will mobile impact the most?

Best buy is becoming the next Circuit City. Other retailers will follow unless they can successful reinvent themselves. Health is more regulatory driven so the progress will be slow though it is ripe for a complete overhaul and developing nations are moving much faster in this space.

15. What will be the dominant revenue model for apps in 2012?

In-app revenue model made good strides in 2011 but the combination of the various available revenue models will be the norm for most application developers.

16. What mode of mobile payments will get traction in North America and Western Europe in 2012?

2011 was the year to set the ground work for growth in the mobile payments space. Given the investment and focus, we are likely to see more movement and consumer involvement in 2012 with proximity based solutions and commerce of physical goods on mobile.

17. What will be the most successful non-mobile-phone category in 2012?

Tablets dominate. Period.

18. Which of the following are likely to happen in the near future?

The is a significant shift in computing taking place right in front of our eyes wherein tablets are replacing laptops and even desktops in the enterprise. European operators have been experiencing tough times while some of the Asian operators are flush with cash, they might make their move in 2012 though regulatory hurdles might prove to be an issue. 33% of the nations will have elections in 2012, maybe which will move mobile voting to the forefront in some nations. Our panel thought there is a better chance of humans discovering water on another planet than rise of another significant mobile OS.

19. Which areas will feel the most impact from Regulators in 2012?

Net-neutrality and market competitiveness will keep the regulators busy in 2012.

20. Who was the mobile person of the year?

Clearly, Steve Jobs was an easy choice but who will replace him 2012? Jeff Bezos has an early lead followed by Andy Rubin and Mark Zuckerberg. Angry Birds representing the developer community will be in for another terrific year. Other honorable mentions were Tim Cook, Paul Jacobs, Sanjiv Ahuja, Dan Hesse, and Glenn Lurie.

A lot to look forward to in the New Year. My thanks to all who participated and we hope you found it useful as you embark on your journey for a successful 2012.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Feb 2012. The next Global Wireless Data Market update will be issued in Apr 2012.

Disclaimer: Some of the companies mentioned in this survey are our clients.

The Mobile Future Forward 2011 Book will contain 18 essays from thought-leaders around the globe and is going to be distributed exclusively to the Mobile Future Forward attendees on Sept 12th. The book is published by FutureText, UK.

The essays from the Mobile Future Forward speakers and industry luminaries are:

1. How Mobile Will Change The Way We Spend – Chetan Sharma, President, Chetan Sharma Consulting

Executive Summary

In his 1943 paper titled “A Theory of Human Motivation”, the famed philosopher Abraham Maslow theorized his observations of human needs and curiosities. His pyramid came to depict the human hierarchy of needs. If we map the physiological, safety, love, esteem, and self-actualization needs onto how much we spend as a community, it correlates rather well. As you would expect, human spending behavior is tightly tied to the basic needs. The amount of money we spend on these basic needs might vary by demographics or region but in aggregate, we tend to spend the most for the things that are the bottom of the pyramid – shelter, food, and water.

Over time, entrepreneurs have used technology to drive fundamental changes in consumer behavior for e.g. Microsoft with personal computers, Google with search, Apple with devices, Facebook with social connections. Of course, the web of interconnection, the various vertical industries that map against the human needs is very complex and as new technology cycles come into play, inventors get busy with enhancing performance sometimes by manifold to keep up with the insatiable demand and appetite to do more.

It is very clear that mobile will be at the center of human evolution for years to come. Mobile collapses time and distance and as such impacts every facet of our lives. While we have come to know the mobile phone as a communications device, their role in our daily lives has been expanding. From checking emails, paying for tickets, sending money transfers, taking pictures of your kids, watching soccer World Cup live, checking commodity pricing, to emergency response to mHealth (mobile Health), mobile devices have become an essential tool to help us navigate our day. As we alluded to earlier, it is not just the traditional phones that have cellular connection these days; we are slowly but surely moving into an era where a majority of electronic devices from small tags to giant billboards will have a communication channel that both machines and humans can interact with.

Mobile also plays a key role in how we go about the most basic transaction in a given day that keeps the economy humming – spend.

In this paper, we will take a look at how the connected universe of devices and sensors are going to impact the way we spend and how all this creates new opportunities to meet the basic human needs.

The global mobile industry is the most vibrant and fastest growing industry. We expect the total revenue in the industry to touch approximately $1.3 Trillion in 2011 with mobile data representing 24% of the mix. Global Mobile Data revenues are expected to eclipse $300 Billion for the first time in 2011. It is also the first year in which non-messaging data revenues will make up the majority of the overall global data revenues at 53%.

We expect the total number of subscriptions to exceed 6 billion by the end of 2011. The first 1 billion took over 20 years and this last one is going to take only 15 months. The primary growth drivers are India and China which are cumulatively adding 75M new subs every quarter. Indian and China are also entangled in the race to the billion. At the end of Q2 2011, China was ahead by 50M but India is adding subscriptions at faster rate and is likely to eclipse China before Q2 2012. By then, both nations are expected to exceed 1 Billion in total subscriptions making up 31% of the global subscriptions.

In Q1 2011, US became the first major market to exceed the 50% mark in smartphone sales. The global figure stands at approximately 26%. Some operators expect 90% of their devices sales to be smartphones by the end of the year. In terms of the actual smartphone penetration, we expect the US market to eclipse the 50% mark in 2012.

China leads in the number of subs but US dominates in both total and data revenue. A number of emerging nations are now in top 10 – Brazil, India, Russia, Indonesia, Pakistan, Mexico while once dominant – Korea, UK, Italy, Germany have dropped off or slipped in rankings.

The number of mobile operators with more than $1B in data revenues will increase to 47 in 2011. This number was only at 13 in 2005.

Japan continues to be the leader in mobile data with NTT DoCoMo, KDDI, and Softbank Japan ahead of the pack in terms of mobile data revenue and data as a % of total ARPU. In 2011, it became the first major market to have more than 50% of its mobile revenue from data services. Next, Australia and the US have made good inroads in the last two years. In fact, if we look at the overall data revenue, US is much further ahead than any nation due to the size of the market.

While India has the highest subscriber growth rate in the world right now, the revenue generating opportunity remain down right anemic compared to other major markets with average dropping down to $3.50 in overall ARPU. Even with significant subscriber base, there is going to be a general lack of opportunity in the market for the next couple of years relative to other markets.

–Majority of the device sales in the US are now smartphones. Device Replacement is shrinking

5.Mobile Broadband (4G) is being deployed at a faster rate than previous generations

–Over 1 Billion broadband connections by 2011

6.Global Mobile Apps revenue has shifted to off-deck

–The decline is directly proportional to the increase in smartphone penetration by region

7.All major markets are consolidating with the top 3 players at 85% of the market

–Regulators will have to be more prudent and proactive about managing competitiveness and growth

8.Mobile Data Traffic will be 95% of the global mobile traffic by 2015

–Many countries are facing spectrum exhaust in the next 5 years

9.Connected device segment is growing at the fastest pace

–Operators will have to quickly adapt their strategies to stay relevant in this segment

10.Several multi-billion dollar opportunity segments are emerging

–Mobile Advertising, Mobile Commerce, Mobile Wellness, Mobile Games, and Mobile Cloud Computing to name a few

11.Mobile Ecosystem has become very dynamic and unpredictable

–Apple, Google, Amazon, and Facebook have become the most important revenue generating mobile platforms

12. There will be more changes in the next 10 years than in the previous 100

– The value chains will keep disrupting every 12-24 months by the new players and business models

13. Intellectual Property has become a key component of long-term product strategy

– Top 20 control 1/3rd of the overall mobile patent pool

Devices

Apple has had the tablet space to itself. Thus far the response from the competitors has been tepid esp. on the pricing dimension. Apple has had such a mastery over the supply-chain and months ahead of the competition that by the time they figure out details, Apple already locks up the pricing advantage for the cycle. OEMs try to catch-up on the features but can’t do on the margins. OEMs can grow the pie by bringing products at a better price points that helps attract different demographics to the mix. Microsoft can make good inroads into the space with its Win8 tablet release in 2012 but it will be again in a catch-up mode as the iOS ecosystem will be even more robust by then. The cheaper Android tablets will do well in the market. As expected, tablets will pretty much eliminate the need for netbooks and are starting to eat into the desktop/laptop revenue.

Nokia and RIM are under severe market scrutiny as investors and developers leave in droves. Lack of product planning and execution has left their market share in disarray. Nokia’s valuation has been cut into half while the newcomer HTC edged past the industry giant in a remarkable story of the year. Nokia’s release of N9 shows the engineering and creative design depth but a lot is riding on the first generation of Nokia Windows Phones. While the market hasn’t shown much appetite for Windows phone thus far, a good family of devices might be able to slow the loss trajectory and position the combined team for the up-for-grabs 3rd spot in the ecosystem. HP’s acquisition of Palm is finally bringing some new products to the market but the lack of an effective ecosystem means lack of traction in 2011. Given that the computing is shifting to mobile devices, we can expect some of the weaker desktop/laptop players will exit the industry.

Tablets are primarily being used in the WiFi mode because the primary use case is indoors and WiFi gives a better (and cheaper) user experience. Once operators start to roll out user-friendly family data plans across multiple devices, we can expect the cellular activation go higher but will still be dominated by WiFi overall.

The number of connected devices per subscriber and per family will continue to increase over the course of this decade. As the cost structure and margin profile for these devices will be different, we are likely to measure performance of various operators using margin analysis for e.g. while the ARPU for connected devices is 5-10 times lower than the postpaid subscribers, the margins are typically higher due to lower costs of sales, marketing, support, and subsidy. As such the overall impact is dilutive ARPU but higher margins. So, instead of focusing on just the ARPU, the efficiency of operators will be measured in how well they maintain average margin per user (AMPU) and average margin per connection (AMPC).

Managing the data growth

As a result of the data tsunami, there are two types of opportunities that are being created, one that take advantage of the data being generated in a way that enhances the user experience and provides value and the other in technologies that help manage the traffic data that will continue to grow exponentially.

To be able to stay ahead of the demand, significant planning needs to go in to deal with the bits and bytes that are already exploding. New technical and business solutions will be needed to manage the growth and profit from the services. Relying on only one solution won’t be an effective strategy to manage rising data demand. A holistic approach to managing data traffic is needed and our analysis shows that the cost structure can be reduced by more than half if a suite of solutions are deployed vs. a single dimensional approach and thus bringing the hockey stick curves of data cost more in line with the revenues and thus preserving the margins.

The decision making process within the operator organizations will need to be streamlined as well. Operators should also consider creating a senior post which focuses on both the cost side and the solution side so they can devise and institute a sustainable long-term policy and keep the margins healthy.

Competitive landscape

The Rule of Three is evident in all major markets. While the percentage market share might vary, on an average, the top 3 control 93% of the market in an given nation. It doesn’t matter if the market is defined by “controlled regulation” like in China, Korea, and Japan or if it is “open market” driven in markets such as the US, UK, and India. Eventually, only top 3 operators control the majority of the market. There are niches that others occupy but they are largely irrelevant to the overall structure and functioning of the mobile market.

Markets such as US and India experienced similar competitive environment in their hyper-growth phase. For the US, this phase was in the nineties-mid-2000s while India has been experiencing the similar environment in the last 3-4 years. In both cases, at the start there are 5-6 players with no more than 25% market share but higher than 10% of the mix but gradually the market forces enable consolidation. Over a period of 18 years, US is settling into a “top 3” operator market. India’s brutal price wars are going to trigger the consolidation in the next 12-24 months and will eventually settle into a structure similar to other markets.

The competitive equilibrium point in the mobile industry seems to when the market shares of the top 3 are 46%:29%:18% respectively with the remaining 7% being allocated to the niche operators. To achieve some semblance of equilibrium in the market the top operator shouldn’t have more than 50% of the market share and the number three player shouldn’t have less than 20%. This helps create enough balance in the market to derive maximum value for the consumer.

Mobile operators will face some hard choices in developing and protecting the role they want to play in a given region and the ecosystem at-large. The strategy they choose will have a direct impact on the expected EBITDA margins, investment required over the long-haul, how investors view them, and on the competitive landscape of the country. Given, the fast pace of globalization, new rules and trends might emerge over the course of this decade that further define “communications” and “computing” as we know it.

Apps and Services

As expected, mobile commerce and payment discussions are dominating the ecosystem. There is clearly a lot of investment and marketing dollars being spent. However, the traditional payments networks are largely intact. The new opportunities are being built on top of the existing payment platforms with convenience (Square) and offers and advertising (Google Wallet, ISIS, Groupon). Beyond payments, mobile is getting ingrained into every vertical and every facet of our lives – from healthcare to education, from energy to entertainment, from communication to socialization. And we are in the early innings of figuring out the business models, ecosystem leaders, user behavior, regulatory needs, and the overall impact on society.

Ecosystem Dynamics

It is very clear that the ecosystem dynamics can change very quickly, one just can’t take the competitive and friendly forces for granted. In the past, the silos and segments were clearly defined with little overlap. However, over the course of last couple of years, players have been migrating and surfing in segments across the board - from Apple to Visa, from P&G to AT&T, from Facebook to Time Warner, from Google to Best Buy, every company wants to capture the mindshare and piece of the consumer’s pocketbook. The fine line between partners and competitors can get obliterated in a quarter. Apple is competing with Cisco, Comcast is going after AT&T’s business, Visa and Verizon want to be the payment channel of choice, Amazon is gunning for Microsoft’s enterprise business. One product launch, one acquisition, can change the game in an instant. And this is only the beginning.

Mobile is fundamentally reshaping how we as consumers spend from housing and healthcare to entertainment and travel, from food and drinks to communication and transportation. Mobile not only influences purchase behavior but also post purchase opinions. When the share button is literally a second away, consumers are willingly sharing more information than ever before. Mobile is thus helping close the nirvana gap for brands and advertisers who seek to connect advertising to actual transactions. The long-term battle is however for owning the context of the users. Having the best knowledge about the user to help drive the transaction is the simply the most valuable currency of commerce.

Mobile Future Forward

We will be discussing the global mobile ecosystem – the challenges and the opportunities at our annual mobile thought-leadership summit – Mobile Future Forward - brought to you in partnership with our terrific partners – Qualcomm, Millennial Media, Real Networks, AT&T Interactive, Synchronoss Technologies, OpenMarket, Ericsson, and Openwave. Hope to see you in Seattle on Sept 12th.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Aug 2011. The next Global Wireless Market update will be issued in Jan 2012.

Disclaimer: Some of the companies mentioned in this paper are our clients.

The US wireless data market grew 4% Q/Q and 23% Y/Y to reach $15.4B in mobile data service revenues in Q1 2011 and is on course to increase Y/Y by 22% to $67B in 2011.

Of all the segments, the connected device category registered the highest growth at 9.6% Q/Q while the postpaid subscriptions growth was almost flat for the quarter. Connected devices (including tablets, M2M, telematics, eReaders, etc.) now account for 8% of the subscription base.

For the first time, the smartphone sales crossed the 50% share mark in the US. Also, the US now accounts for approximately one-third of all smartphone sales in the world.

The Big News - AT&T’s proposed acquisition of T-Mobile

The big news during Q1 2011 was of course the blockbuster announcement of the acquisition of T-Mobile USA. We had pondered on the viability of 4 operators in the US market in the past. All the major mobile market eventually settle with three main players controlling the market. So, the news wasn’t a surprise as we had expected something to break loose and conform to the natural market evolution. T-Mobile US has been under tremendous pressure for the last 2 years being unable to expand its postpaid base despite modernizing its network/backhaul and introducing a slew of impressive handsets. It was getting squeezed both from the top (Verizon and AT&T) and from the bottom (MetroPCS, etc.) while duking it out with Sprint in the middle. The decision window was closing as Deutsche Telekom had to decide if it wanted to invest in LTE or not (in the US market). Given that the parent business has been under pressure as well, it decided to take the most attractive available option.

The proposed merger will obviously have an impact on the market structure. The market power will get concentrated in the top 2. The HHI3 Index will go from .22 to .31 but the HHI3 value will be at par with UK, Canada (though the Canadian market is not a good proxy for a competitive market), and some of the other markets. The biggest task for the US regulators will be to analyze the impact on the consumer interest and service pricing on a market-by-market basis.

Putting things into perspective, this move is not unusual for a developed market. On average, the top 3 operators in the developed markets around the world control 94% of the market. The proposed merger roughly resembles the merger that took place in UK last year when T-Mobile and Orange, the number 3 and 4 player (each having approximately 19% of the share) respectively in the market merged to form Everything Everywhere and become the number 1 player in the market with 38% market share.

However, if we look at the history of competitiveness in the US mobile market, the market and revenue concentration will be at its highest in the history of the US wireless industry. Such a move is likely to have an impact on the ecosystem depending on the regulatory policies.

An unfortunate side effect of an industry moving too fast is that regulations are often behind the curve (we discuss the role of regulators in our Competition paper mentioned above). Q2 will see a lot of heated debates around privacy and competition. Current regulatory framework in the US seems ineffective to meet the demands of the digital age. The indecision and a weak regulatory framework can be harmful to the ecosystem. While the industry has done a poor job of explaining targeting and relevancy and the associated consumer benefits, by over reacting, regulators can mess up the potential for better services. It is not the mechanics they need to regulate but the “transparency” of services and policies in plain English. Regulating transparency seems to be a more effective way. The ecosystem players will do better if they use transparency not as a threat but as a competitive advantage.

The new troika - AAG

A couple of years back, I gave a talk about the changing mobile ecosystem and what it means to compete in an environment where the ecosystem stacks get reshuffled every few months. I wrote about that in an essay that was published in the Mobile Future Forward book last year. While innovation is coming from all angles - fast and furious - the troika of Apple, Amazon, and Google is leading the way right now. Their interests are clashing in multiple dimensions - device, user data, cloud, advertising, local, commerce, books, etc. In a fast changing environment, either you define the market or be defined by it. The journey from being an arch-rival to a frenemy (and vice-versa) can be a short one.

A significant shift

As we mentioned in our last research note, 2010 marked the milestone of the start of a new computing and communications era. For the first time in the US, the smartphones shipments exceeded the traditional computer segments (that consists of desktops, notebooks and netbooks). Smartphones and the connected devices now account for 51% of the computing devices revenue in the US (devices include desktops, notebooks, netbooks, tablets, eReaders, and conventional feature and smartphones)

The growth in of connected devices

The connected devices category is the fastest growing segment of the market and while the ARPUs are low, due to the higher margins this segment will prove to be the most profitable in the coming years. By the end of 2011, connected devices will be commanding double digit market share. However, not all sub-segments are going to be successful in the operator channel until multi-device data pricing plans are introduced.

Apple’s iPad has been, as expected, a runaway success. Several other tablets launched in 2011 but none has come close to being a credible challenge. OEMs will do well to segment the market and price accordingly rather than follow Apple in performance and pricing. Market is fairly young and there is tremendous room for growth. Another trend that is obvious is the development of an alternate ecosystem. 85% of the tablets use primarily use WiFi for connectivity meaning that OEMs need more diverse distribution channels. Operators who start to bundle multiple devices by single data plans and data buckets are going to see a better yield in this category.

We do expect multi-device or family data plans to start being introduced in the US market in 2011. Also, the $200-250 Android tablets will start to emerge during the second half of the year to broaden the choices for the consumers.

Turmoil in the OEM land

Another headline grabbing event in Q1 2011 was that of Microsoft’s partnership with Nokia. Nokia’s lack of a credible response to Apple and Android has left the company scrambling for survival. Nokia still dominates the unit sales but the domination of Apple and the Android OEMs has taken away significant profits and ecosystem mindshare. Industry is awaiting the first release of the Windows phone from Nokia which will have a lot riding on it. If the release of iPhone 5 coincides with this release, the Christmas selling season will be interesting.

The OEMs that have impressed the most are HTC and Samsung. The collapsed release cycles and the fierce pace of introduction of new devices have caught many of the traditional players unprepared. These things have a tendency of going in cycles so we expect the pendulum to swing again in the next 12-24 months.

There is a fight for the #3 spot and it is likely that Windows will fill that void. However, for developers, iOS and Android are the only platforms they need to worry about right now.

Verizon finally got its iPhone and as expected it didn’t make a big dent into the AT&T’s financials.

Platforms - Horizontal vs. Vertical

Over the past few quarters, we have seen a fascinating battle brew between the horizontal (Android and Windows) and the vertical (Apple, RIM, Nokia) device platforms. In the US, in the smartphone category, the horizontal platforms (primarily Android) has been gaining significant share since Q1 2010 and now have over 65% share of the new devices sold while the vertical platforms’ share has declined to 35%. However, the revenues and profits are still dominated by the vertical platforms.

What to expect in the coming months?

All this has setup an absolutely fascinating 2011 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems. We are going to be discussing the ins and outs of how the industry is going to evolve in the next decade in our Sept 12th mobile thought leadership summit – Mobile Future Forward which is bringing exceptional industry thought-leaders, inventors, and doers to brainstorm, discuss, and debate what’s next. Hope you can join us.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q1 2011 US wireless data market is:

Service Revenues

The US Wireless data service revenues grew 4% Q/Q and 23% Y/Y to $15.4B in Q410. The mobile data services revenues for the US market are expected to reach $67B in 2011.

Verizon and AT&T had a good mobile data quarter accounting for 76% of the increase in data revenues in Q1 2011.

T-Mobile’s HSPA+ drive is starting to pay dividends. While the postpaid net-adds were still in the red, its data growth is starting to match with its peers. The 27% smartphone base definitely helps.

For the quarter, AT&T and Verizon accounted for 69% of the market data services revenues and 65% of the subscription base.

AT&T edged past China Mobile to become #3 operator by mobile data revenues. Verizon is already at #1 followed by NTT DoCoMo. Sprint and T-Mobile maintained their #6 and #8 rank in the top 10 mobile data operators list for Q1 2011. The proposed merger of AT&T and T-Mobile will make AT&T #1 by a distance and place 20% of the global mobile data revenues in the hands of the top two US operators.

ARPU

The Overall ARPU increased by $0.11. Average voice ARPU declined by $0.36 while the average data ARPU grew by $0.47 or 3% Q/Q.

The average industry percentage contribution of data to overall ARPU was 35% in Q111 and is likely to touch 40% by year’s end.

Verizon and Sprint were neck-and-neck in data ARPU followed by AT&T. In terms of % contribution, all the top three operators exceeded the 30% mark. T-Mobile ended the quarter with approximately 29% of its revenue coming from the data services.

We expect data revenues to exceed voice revenues in the US market before Q2 2013.

Subscribers

Helped by the growth in connected devices, the overall net-adds increased by 4.9M.

For the sixth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. Connected devices are now almost 12% of AT&T’s subscription base.

Overall, AT&T has 43% of the connected device share of the market. The connected device segment grew 9.6% Q/Q and 48% Y/Y.

· Sprint is on good comeback adding over million customers. Sprint extended its streak of positive net-adds to four quarters by adding over a million subs for the second straight time since Q1 2006.

· T-Mobile however continues to be sandwiched between the top three and the next three and is having a hard time adding postpaid subscribers.

Applications and Services

While the percentage share of the data revenues is declining for messaging, the revenue growth stays strong with almost $5B in revenues.

The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education. The fight for the 3% block is finally in the open. Operators, financial institutions, and the internet players are all vying for a piece of the mobile wallet. Much more to come in 2H 2011. (We will be going in-depth into mobile commerce and payments in our upcoming Mobile Breakfast Series event on Jun 28th)

Handsets

Nokia sold 108.5M units in Q1 2011 accounting for 28% of the market share. Samsung continues to be one of the most agile players in the device business shipping 70M for a 18% share of the market. The nimble team at HTC outclassed its bigger peers and edged past Nokia in market cap.

Apple, a company that was given a lifeline by Microsoft in 1997 is now valued 45% or $100B more than Microsoft primarily on the strength of its wireless portfolio.

In the US, for the first time, 51% of the devices sold were smartphones. Global average is at 26%. One-third of all smartphones sold were sold in the US making it the hot bed for consumer devices.

Smartphones now account for 80% revenue of all phones sold in the US.

In the vertical vs. horizontal platform battle, the ecosystem is shifting towards horizontal domination in the near-term (units sold) while a majority of the profits reside in the vertical column.

85% of the tablets use WiFi only (some have inactivated cellular chipset) meaning the operator channel is not a necessary distribution channel. Operators who start to bundle multiple devices by single data plans and data buckets are going to see a better yield in this category.

Global Update

Race to a billion - India went past 800M in Q1 2011 subs and is closing on China and we expect that by the end of the year, India will become the largest mobile market on the planet. By early 2012 both India and China will have more than a billion subscriptions.

China Mobile crossed the 600M subscription mark however its 3G introduction has had a tepid response thus and its 4G strategy remains in flux.

More details to come in our global market update.

Your feedback is always welcome.

Thanks.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Aug 2011. The next Global Wireless Data Market update will be issued in Jun 2011.

Disclaimer: Some of the companies mentioned in this paper are our clients.

Over the course of the last decade, mobile communications has become an essential part of the global fabric of evolution. With almost 70% global subscription penetration as of 2010, mobility is being embedded into almost every facet of our lives. Mobility is also spreading across verticals whether it is m-pesa in Kenya or SMS based counterfeit medicine detection in Ghana or paying for your coffee using your NFC enabled mobile phone in a Tokyo café or watching the cricket world cup broadcast while hiking the Yangtze river near Tibet. Consumers expect access to information everywhere they are and the ecosystem is responding with continued innovation, which has become extremely critical in managing the competitiveness of nations.

It is also apparent that some of the innovation and market dynamics has been evidenced by the competitiveness of these markets at different levels – network, devices, and services. While the market entry conditions into the devices and software services markets have gone through significant overhaul this last decade, the competitiveness framework of the mobile networks has been more structured and controlled in many instances.

Given the importance of the mobile network infrastructure to every nation’s competitiveness, security, and productivity, it is useful to understand how the “competitive mobile markets” are formed. In theory, the perfectly competitive markets are in the best interest of the consumers as they provide the best value given the competitive dynamics and the equilibrium provides good checks and balances for the ecosystem.

The global mobile networks have shown a remarkable adherence to the “Rule of Three” which states that in any mature industry, 3 top players dominate the market. Sometimes it has been dictated by the regulators and in other instances by the markets. Some markets like in Europe have settled into a state of equilibrium while other hyper growth markets like India are shuffling to find the right balance.

The elements of globalization are also shaping how mobile network operators grow. The regulators and the political class are increasingly looking at mobile networks as national assets and any foreign ownership generally goes through tremendous scrutiny.

Having worked in major mobile markets around the world, we have been intrigued by the framework for a competitive market and this is the theme we explore in this working paper. Having the front row seat in an industry that is growing stupendously has given us some unique perspective on the competitive forces at work in the mobile space. We studied the competitive landscape in 40 top mobile markets around the globe.

This paper presents the analysis and an in-depth analytical framework to study the competitive landscape in the global mobile markets.

The US wireless data market grew 5% Q/Q and 23% Y/Y to reach $14.8B in mobile data service revenues in Q4 2010. The final tally for the 2010 year was $55B and we expect this to increase by 22% to $67B in 2011.

The US mobile subscriptions officially crossed the 100% penetration mark in Q4 2010.

Of all the segments, the connected device category registered the highest growth at 55% while the postpaid subscriptions grew by only 3% for the calendar year. Connected devices (including tablets, M2M, telematics, eReaders, etc.) now account for 7% of the base.

A significant shift

2010 marked the milestone of the start of a new computing and communications era. For the first time in the US, the smartphones shipments exceeded the traditional computer segments (that consists of desktops, notebooks and netbooks). In 2011, the smartphone segment along with the connected devices (tablets and eReaders) will not only exceed the computer segment in unit shipment but more importantly in the overall revenues as well. Of course, these categories are merging and the lines are blurring but it is good to take stock of the transition which will create new ecosystems and decimate the old ones over the course of this decade.

The evolution of connected devices

The connected devices category is the fastest growing segment of the market and while the ARPUs are low, due to higher margins this segment will prove to be the most profitable in the coming years. By the end of 2011, connected devices will be commanding double digit market share. However, not all sub-segments are going to be successful in the operator channel until multi-device data pricing plans are introduced. Most of the tablets and eReaders can work well with only WiFi most of the times. Monthly data plans make sense for enterprise users but not for consumers who might use these devices occasionally. As such tablets will be more successful in direct and traditional retail channels.

Operators who start to bundle multiple devices by single data plans and data buckets are going to see a better yield in this category (We will be discussing the connected devices universe in our upcoming Mobile Breakfast Seriesevent in April).

Similarly, OEMs who rely on the operators for sell-through of tablets/eReaders will see low volumes vs. players who have more diverse distribution channels (Apple and HP). We do expect multi-device or family data plans to start being introduced in the US market in 2011.

As we had mentioned in our last research note, iPad (and other tablets) are making Netbooks irrelevant. In fact, tablets are starting to eat into the laptop category as well. As expected, the device has been a hit with many enterprises with mobile workers. Many enterprises are giving out iPads to their workforce instead of laptops or Netbooks.

At CES 2011, hundreds of tablets were introduced. While the total number of releases was noteworthy, we expect iPad to dominate the space in 2011 as competitors will find it hard to compete across all dimensions - price, performance, ecosystem, distribution, and brand power.

Mobile Data Consumption

Mobile data consumption continued to grow across all networks increasing 2-5 times on major US networks. Many of the superphones introduced in 2H10 are clocking 1-1.5GB/mo average. The average data consumption in the US at the end of 2010 was 350 MB/mo. Thus, while the data revenues for the year increased 23%, the mobile data traffic grew 132%.

The significant rise in the smartphones sales and usage in the US market (over 50% devices sold in the US in 2010 were smartphones almost twice the global average) means that by the end of 2011, in the US, the smartphones will consume more data than the data cards for the first time. We also expect US to become the number 1 nation in mobile data consumption this year edging out Sweden. A detailed treatment of the subject can be found in our "Managing Growth and Profits in the Yottabyte Era" paper. Another research update on the topic will be released in 1H11.

The center of gravity has shifted back to the US

As I mentioned in my Time magazine interview earlier this month, there is no question that the center of gravity of the mobile market has shifted back to the US. The Nokia-Microsoft announcement was a wake-up call to many in the industry who were in denial. The innovation is happening all around the world and in many areas other countries are years ahead. The markets are growing faster in India, China, and elsewhere. However, the coordinates of what’s next have clearly changed in the last three years. The software innovation and the next generation network launches in the US are laying the foundation of a solid mobile decade.

US is also the most dominant market in terms of revenue generation for the industry. While the US represents less than 6% of the subscription base, it accounts for over 21% of the data revenues with Verizon Wireless becoming the number one mobile data operator in 2010 edging past the decade long leader NTT DoCoMo. AT&T also went past China Mobile to gain its current number three ranking. By the end of 2013, the US market will account for 25% of the global mobile data services revenues (We will have a detailed analysis of the global markets in our upcoming research note in march).

Nokia-Microsoft partnership

Nokia’s market problem can be summed up thusly - “While Nokia sold 10 times more devices than Apple in 2010, its market cap is 1/10th that of Apple.” It has been clear for some time that things had to change at Nokia.

Weeks leading up to the Mobile World Congress were rampant with curiosity of who will Nokia marry to continue its next phase of device journey. The multi-billion dollar offering from Microsoft proved too hard to resist for Nokia. This news completely dominated the MWC chatter and the topic comes up invariably in many conversations since then. One has to give points to Nokia for decisiveness and for moving quickly under the pressure.

It is also indisputable that the deal is a significant win for Microsoft who has been looking to come back into the game. However, impact on Nokia remains uncertain. While there were risks with Android, going with Win7 is not an assured path to resurrection either. It all comes down to execution. Can the troops be rallied to produce a slew of competitive devices quickly that consumers and operators will find attractive?

Microsoft understands developers better than most and the two companies can bring in tremendous scale and complementary toolsets to attack the market. Nokia has significant talent and it’s a proud company but jumping into the shark-infested cold waters miles away from the shore will require all the stamina, good weather, and skill it can muster to make landfall before thanksgiving.

MeeGo is likely to go back into Intel’s camp and might look interesting to the likes of LG, Samsung and even Motorola though creating a new ecosystem is a tall order. Never a dull moment in the industry, is there?

Impact of iPhone on AT&T

It finally happened. The Verizon iPhone has kept the media busy for the last 3.5 years. It was quite an anticlimactic moment when the device finally came to the 2nd operator in the US. It was inevitable that one of the longest exclusive relationship in the wireless world will come to an end. The iPhone singlehandedly turned around AT&T relative to Verizon in the net-adds race. For 10 quarters leading up to Q2 2007, AT&T was adding less net-adds compared to Verizon, in fact the cumulative net-add loss was 3.7 million subs on an average of 374,000 subs per quarter. As soon as the iPhone was launched in Q2 2007, AT&T started adding more net-adds compared to Verizon with the 14 quarter cumulative net-add difference close to 6 million subs on an average of 426,000 subs per quarter.

What to expect in the coming months?

Kids of the now generation are growing with connected electronics that is fundamentally altering the behaviors and expectations of interaction, communication, consumption, and monetization.

Android and iOS are completely dominating the developer and ecosystem mindshare and the race to become a viable 3rd option is on. Operators would love to see another competitive force emerge in the market.

All this has setup an absolutely fascinating 2011 in the communication/computing industry. Convergence is everywhere and is leading to a fundamental reset of the value chains and ecosystems. We are going to be discussing the ins and outs of how the industry is going to evolve in the next decade in our Sept 15th mobile thought leadership summit – Mobile Future Forward which is bringing exceptional industry thought-leaders, inventors, and doers to brainstorm, discuss, and debate what’s next. More details to come.

US is also leading the way in smartphone sales. In Q4 2010, 48% of the devices sold in the US were smartphones compared to 25% globally. The fast pace of device introduction has catapulted the agile players like Samsung and HTC to the forefront while others like LG and Sony Ericsson have lost ground. By singularly focusing on Android, Motorola did quite well in 2010 but 2011 is going to be challenging.

The pace of product introduction is accelerating with each quarter. Devices of all shapes and sizes are coming into the market literally every week. Players are having to re-evaluate their businesses and long-term strategies. There are several players whose future is at stake. The competition has grown fierce and companies are finding it hard to take ideas from R&D to products in market in a short amount of time.

While 2010 started quite active on the regulatory front as the national broadband plan was unveiled in March little substantive progress has been made w.r.t. the spectrum, net-neutrality, and other broadband related issues. The matter has swiftly moved to courts where it will take months before anything useful comes out.

Operators are starting to diversify more aggressively than in the past. AT&T’s mobile enterprise business is a leading indicator of this trend. Their focus by verticals has yielded new revenue streams and positioning them to become a one-stop shop for devices, access, and services in the enterprise market.

As usual, we will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q4 2010 and 2010 US wireless data market is:

Service Revenues

The US Wireless data service revenues grew 5% Q/Q and 23% Y/Y to $14.8B in Q410. The mobile data revenues for the US market reached $55B in 2010.

Verizon, AT&T, Sprint had a good mobile data quarter accounting for 86% of the increase in data revenues in Q4 2010.

T-Mobile’s 3G/4G drive is starting to pay off. While the postpaid net-adds were still in the red, its data growth is starting to match with its peers. The 24% smartphone base definitely helps.

For the calendar year 2010, AT&T and Verizon accounted for 69% of the market data services revenues and 64% of the subscription base.

Verizon Wireless edged past NTT DoCoMo and AT&T went past China Mobile to become #1 and #3 respectively in operators by mobile data revenues in 2010. Sprint and T-Mobile maintained their #6 and #8 rank in the top 10 mobile data operators list for 2010.

ARPU

The Overall ARPU decreased by $0.58. Average voice ARPU declined by $0.90 while the average data ARPU grew by $0.32 or 2% Q/Q.

The average industry percentage contribution of data to overall ARPU was 34% in Q410.

Verizon led in data ARPU with $18.79 followed by AT&T and Sprint. In terms of % contribution, all the top three operators exceeded the 30% mark. T-Mobile ended the quarter with approximately 28% of its revenue coming from data services.

We expect data revenues to exceed voice revenues in the US market by Q2 2013.

Subscribers

US crossed the 100% penetration mark in terms of total subscriptions.

Helped by the growth in connected devices, the overall net-adds increased by 4.9M.

For the fifth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. Connected devices are now almost 10% of AT&T’s subscription base.

Sprint made a nice comeback in 2010 reversing the 11 quarter negative net-adds trend by adding three straight positive net-add quarters. Sprint extended its streak of positive net-adds to three quarters by adding over a million subs for the first time since Q1 2006.

T-Mobile however continues to be sandwiched between the top three and the next three and is having a hard time adding postpaid subscribers. For the year, the operator ended the year 390K subscribers (postpaid) below the 2009 levels. It’s churn rate is almost 60% higher than the average of its top competitors and the cost of postpaid churn was over half a billion dollars in 2010. However, the increased smartphone penetration, quick HSPA+ deployment, backhaul upgrades, and a clever marketing campaign is helping on the mobile data front.

Applications and Services

While the percentage share of the data revenues is declining for messaging, the revenue growth stays strong with almost $17B in messaging revenues.

In 2010, there was a significant shift that took place in terms of app revenues. There was more revenues generated (globally) from off-deck than on-deck for the first time and while the on-deck revenues are in billions, the decline trend looks irreversible. In the US, this shift will occur in 2011.

The usage and data consumption trends are enabling carriers to accelerate their 3.5G/4G plans and develop long-term business and technical strategies.

The market is finally starting to see activity in the mobile commerce and payment services as well as in various industry verticals like healthcare, retail, and education. Much more to come in 2011.

Handsets

Nokia sold 123.7M units in Q4 2010 accounting for 31% of the market share. Samsung continues to be one of the most agile players in the device business shipping a whopping 80.7M for a 20% share of the market. Apple again edged past RIM to be in the top 5 along with the new entrant ZTE which broke into the top 5 for the first time.

Data Traffic

As we noted in our previous updates, the data traffic is now significantly more than the voice traffic. By end of 2010, the average US consumer was consuming approximately 350 MB/mo up 132% in 12 months. The good news is that there are several solutions available and are being invented that will help manage the data growth starting with the tiered pricing plans.

Q4 10 also saw significant activity in the 4G space with Verizon launching its LTE network and after the ITU flip-flop, the HSPA+ deployments of T-Mobile and AT&T Wireless along with Sprint’s WiMAX made US the epicenter of 4G growth for the next few years.

Your feedback is always welcome.

Thanks.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in May 2011. The next Global Wireless Data Market update will be issued in Mar 2011.

Disclaimer: Some of the companies mentioned in this paper are our clients.

The world of advertising is changing at a dizzying pace. New media are transforming advertising, and consumer expectations have changed accordingly. In this dynamic environment, no communications platform holds more promise than the mobile device.

Mobile platforms present a unique opportunity to reinvent advertising. With mobile, the perception of advertising will shift from interruptive broadcast messages to targeted information services of real value to consumers and positive interactions that have an immediate top-line impact.

Advertisers care about two basic metrics – reach and purity. They want to communicate with as many people as possible (reach) and they want to reach the most accurately targeted audience possible (purity). In the past, advertisers have tried to compensate for a lack of purity by casting a wider net, spending inefficiently and often failing to reach their target audience.

With mobile, advertisers can deliver the right information to the right target at the most opportune time; delight the consumer with instant gratification; complete transactions and measure direct correlations between advertising, transactions, and return on advertising (ROA). With the power of real-time metrics in hand, advertisers can scientifically design, measure, and alter their campaigns and deploy strategies for one-to-one relationship building with customers.

Mobile is having a significant impact on local advertising. The attributes of immediacy, location, always-on connectivity, user profile and segmentation, and the viral nature of the medium make mobile the best channel for local advertisers to engage potential customers.

First things first. From all of us at Chetan Sharma Consulting, we wish you and yours a very happy,

healthy, and prosperous 2011. Thanks to all who participated in our 2011 Mobile Predictions Annual Survey. We have found it is the best way to think about the trends coming our way.

We put some of the questions to our colleagues and industry leaders in the industry. We were able to glean some valuable insights from their choices and comments. This survey is different from some of the others in the sense that it includes industry movers and shakers participation. Executives and insiders (n=225) from leading mobile companies across the value chain and around the world opined to help us see what 2011 might bring.

Thanks again to everyone who contributed. We will be calling on you again next year. We are clearly

living in "interesting times" with never a dull moment in our dynamic industry. It has been a terrific

year for us here at Chetan Sharma Consulting and we are looking forward to 2011 and seeing many of

you along the way. We hope you enjoyed gaining from the collective wisdom.

Be well, Do Cool Work, Stay in touch.

Thanks. With warm wishes,

Your feedback is always welcome.

Thanks.

Chetan Sharma

Now onto the 2011 Mobile Industry Predictions Survey Results

The panel comprised of movers and shakers of the mobile industry from around the world.

What will be the biggest stories of 2011?

In last year’s survey, Google/Android narrowly missed out to be the biggest story of the year but this year, the verdict was clear that Google will continue to dominate the headlines with Android devices and new updates and apps. Given that we are in the midst of 4G deployments and ITU’s flipflop on the definition, we could be in for an interesting year.

When will Verizon iPhone launch?

Inordinate amount of ink has been spilt over Verizon’s iPhone speculation. However, given the chatter, our panel voted for a Q1 launch.

Who will be the most open player in the mobile ecosystem in 2011?

In all our surveys Google has consistently cemented its perception of being the most open in the ecosystem.

Will Android tablet sales exceed iOS tablet sales in 2011?

Last year, Android OS edged past iOS, however, given the lead iOS has had in tablets, it might be hard to overcome the number of shipments in 2011.

Who will make the biggest mobile acquisition in 2011?

Got Cash? Big players are likely to go shopping but who will score the blockbuster deal of the year. Google and Microsoft will duke it out with Google taking the spoils.

How will the "Apps vs. Mobile Web" debate shape up in 2011?

Apps vs Mobile Web has been as hotly debated in the industry as the CDMA vs. GSM battles of the past. Our panel thought Apps will continue to grow though mobile web starts to show its muscle.

By how much will the mobile advertising ad-spend increase in 2011?

Our panel was more bullish on mobile advertising than last year with a good 50% of respondents aiming for 200% growth and higher.

Which market will be the biggest infrastructure in 2011 for sales opportunities?

India and China are laying out 3G and North America is expanding on 4G. Infrastructure contracts abound.

Who will be the mobile come back story of 2011?

Many long-time players are under the gun this year. Will Windows 7 help Microsoft or will Meego make Nokia competitive. Story will unfold this year.

Who will end up having the strongest position in the mobile payment/commerce space?

While Japan/Korea markets have developed mature mobile payments solutions, the battle royale of mobile payments in North America will play out between the financial guys and Operators with Internet players making a strong run at it as well. 2011 might help decide the long-term winners in the space. Our panel thinks, the likes of Mastercard and Visa will edge out others in the tussle.

Which areas will feel the most impact from Regulators in 2011?

Regulators can have a huge impact on the course of the industry and nation’s competitiveness. With the laws all but laid out, the real rulings might come from the courts.

Which solutions will gain the most traction for managing mobile data broadband consumption?

2010 saw the emergence of tiered data pricing in North America and operators all over the world are bracing for a long-term challenge of managing mobile data growth. We have written extensively on this subject in our Yottabyte series. Our panel voted for Tiered pricing and 4G as the top two solutions.

Which category will generate the most data revenues in 2011?

Global markets are quite different and while data service revenues have been growing in all regions, our panel breaks down by categories in terms of expected contribution from various segments.

What will help mobile cloud computing gain traction in 2011?

Mobile Cloud Computing is expected to take several strides in 2011 with Media and Enterprise demand at the forefront.

What will be the most successful non-mobile phone category in 2011?

As we have highlighted in our previous research, Connected devices have shown tremendous growth in 2010. Tablet seems to be clear category winner.

What will be the breakthrough category in mobile in 2011?

Mobile payments and commerce are starting to take off and are expected to show the most growth in 2011.

Mobile as a platform is booming with Retail finally getting into the swing of things and will show the most activity in 2011.

What will be the dominant revenue model for apps in 2011?

While paid apps dominated the revenue stream in the early days, advertising and in-app payments are taking off on iOS and Android. Developers will play with a combination of models depending on what works on a given platform.

What mode of mobile payments will get traction in NA and WE in 2011?

Operators experimented with mobile payments over the last few years, now is the time to put the solutions to the test.

Who was the mobile person of the year?

Who can compete with King Jobs. Launching iconic devices year after another, Steve Jobs has set the direction of the industry since 2007 and was a clear favorite for the mobile person of the year. The tremendous success of the apps personified by blockbuster hit of "Angry Birds" took away the second spot with Andy Rubin’s Android effort won him the third spot.

Well, there you have it. The top trends and stories we will be talking about in 2011. Thanks again for all who participated and we hope that you found this useful as you embark on your journey for the year.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Mar 2011. The next Global Wireless Data Market update will be issued in Mar 2011.

Disclaimer: Some of the companies mentioned in this paper are our clients.

The US wireless data market grew 7% Q/Q and 25% Y/Y to exceed $14B in mobile data service revenues in Q3 2010 - on track to meet (and most likely exceed) our initial estimate of $54B for the year.

Sprint had a second straight positive net-add quarter. T-Mobile also reversed its losses and had a net-positive quarter though postpaid additions were down for both the carriers. 2011 is shaping up to be an interesting year with some big M&As on the cards. The launch of 4G networks provides an opportunity to realign the industry.

The US subscription penetration crossed 96% at the end of Q3 2010. If we take out the demographics of 5 yrs and younger, the mobile penetration is now past 101%. While the traditional net-adds have been slowing, the “connected device” segment is picking up so much that AT&T, T-Mobile, and Sprint added more connected devices than postpaid subs in Q3 2010. Given the slow postpaid growth, operators are fiercely competing in prepaid, enterprise, connected devices, and M2M segments.

The role of connected devices

In the connected device category, tablets led almost singlehandedly by the iPad is taking away the lion share of the revenues. The whole category is catching up speed in the US with 12% growth Q/Q much higher than in the postpaid segment which has trickled down to 1% Q/Q growth by Q3 2010.

We expect that in less than 5 years, the connected devices category will generate more revenue for the operators than the entire prepaid segment in the US. While today, connected devices represent only 3% of the quarterly data revenues, this segment didn’t really exist a few months ago and will keep on gaining strength every year for the foreseeable future.

In terms of financials, the addition of connected devices units and revenues to the mix masks the tremendous growth in smartphone related data revenues. For example, T-Mobile lost 360K postpaid subs but added 300K connected devices for a net loss of 60K subscriptions. Because of lower ARPU, Connected devices have a dilutive impact on the revenues and ARPU so the overall ARPU for postpaid segment for T-Mobile was $52 instead of $55.

iPad literally created a new category and rest of the industry is scrambling to respond. Some just want to follow Apple’s trail to cash in while others don’t want to competing head-to-head with Apple so they are launching smaller sized units. There will be others who will launch devices at every inch increments just to see what sticks. However you might slice and dice the market, the segment is here to stay and as we had mentioned before, Netbooks will take a hit as the category was the creature of a falling economy and with a viable alternate, the need for Netbooks diminishes.

Mobile Data Consumption

Data traffic continued to increase across all networks. There are some superphones that are routinely average more than 1 GB/mo, superphones as a category is averaging 700-800 MB/mo. By the end of 2010, we expect the average US consumption to be approximately 325 MB/mo up 112% from 2009. This puts US right behind Sweden in the top two by per capita mobile data consumption. While the US lags Japan and Korea in 3G penetration by a distance, due to higher penetration of smartphones and datacards, the consumption is much higher than its Asian counterparts. Given that it is also becoming the largest deployment base for HSPA+ and LTE, most of the cutting edge research in areas of data management and experimentation with policy, regulations, strategy, and business models is taking place in the networks of the US operators and keenly watched by players across the global ecosystem.

As we had forecasted, the tiered pricing structure for mobile broadband expanded further with Verizon and T-Mobile following AT&T in deploying policy management strategies for controlling data margins. We will see the pricing evolve over the next 2-4 quarters as the US mobile ecosystem adjusts to the new realities and strategies for mobile data consumption.

What to expect in the coming months?

Kids of the now generation are growing with connected electronics that is fundamentally altering the behaviors and expectations of interaction, communication, consumption, and monetization.

Microsoft launched its much anticipated Windows Phone 7 in a bid to recapture the mind- and unit-share. By taking a different UI route, it actually has a shot to be a viable third option to iPhone and Android and pushing RIM from the top 3.

All this has setup an absolutely fascinating 2011 in the communication/computing industry. Convergence is everywhere and is leading to fundamental reset of the value chains and ecosystems. We are going to be discussing the ins and outs of how the industry is going to evolve in the next decade in our Sept 15th event – Mobile Future Forward which is bringing exceptional industry thought-leaders, inventors, and doers to brainstorm, discuss, and debate what’s next. More details to come. We will also be discussing the trends and opportunities in our Dec Mobile Breakfast Series event.

US is also leading the way in smartphone sales. In Q3 2010, 47% of the devices sold in the US were smartphones compared to 24% globally. The fast pace of device introduction has catapulted the agile players like Samsung and HTC to the forefront while others like LG and Sony Ericsson have lost ground. By focusing singularly on Android and by broadening the device portfolio, Motorola has written a great comeback script.

The pace of product introduction is accelerating with each quarter. Devices of all shapes and sizes are coming into the market literally every week. Players are having to re-evaluate their businesses and long-term strategies. There are several players whose future is at stake (to put it mildly). The competition has grown fierce and companies are finding it hard to take ideas from R&D to products in market in a short amount of time.

While 2010 started quite active on the regulatory front as the national broadband plan was unveiled in March little substantive progress has been made w.r.t. the spectrum, net-neutrality, and other broadband related issues.

To start planning for 4G, 5G, and beyond, US should think about rolling a 50 year broadband plan. While more spectrum is always helpful, will we have all the spectrum we need in 2050? or do we need to invent new technologies and business models that use spectrum more wisely? This topic will keep the industry occupied for some time to come.

ITU christened LTE-A and Wireless MAN-Advanced as the “official” 4G technologies but the marketing departments cared less. (We will be releasing the next edition of our “State of the “Mobile” Broadband Nation” in the coming months.

As we had mentioned last year, the mobile data traffic kept on growing disproportional to the revenues. A series of solutions have come into the market from players big and small. We released the second edition of our in-depth research paper on data growth - "Managing Growth and Profits in the Yottabyte Era" earlier this year.

Finally, operators are starting to diversify more aggressively than in the past. AT&T’s mobile enterprise business is a leading indicator of this trend. Their focus by verticals has yielded new revenue streams and positioning them to become a one-stop shop for devices, access, and services in the enterprise market.

We will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q3 2010 US wireless data market is:

Service Revenues (Slides 7, 17)

The US Wireless data service revenues grew 7% Q/Q to $14B in Q310. The mobile data revenues for the US market are likely to reach $55B in 2010.

Verizon and AT&T accounted for 85% of the increase in data revenues in Q3 2010.

T-Mobile’s 3G drive is starting to pay off. While the postpaid net-adds were still in the red, its data growth is starting to match with its peers. The 21% 3G smartphone base definitely helps.

AT&T and Verizon now account for 70% of the market data services revenues and 62% of the subscription base.

ARPU (Slides 8-11)

The Overall ARPU decreased by $0.17. Average voice ARPU declined by $0.99 while the average data ARPU grew by $0.82 or 5% Q/Q.

The average industry percentage contribution of data to overall ARPU is now 33% in Q310.

Verizon led in data ARPU with $18.61 followed by AT&T and Sprint. In terms of % contribution, all the top three operators exceeded the 30% mark. T-Mobile ended the quarter with approximately 27% of its revenue coming from data services.

Subscribers (Slides 12-15)

Helped by the growth in connected devices, the overall net-adds increased by 4.5M.

For the fourth straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. Connected devices are now 8% of AT&T’s subscription base.

Overall, Verizon and AT&T are tied in terms of total connected devices on the network thought AT&T has a much more diverse and revenue-rich base.

The connected device segment grew 12% Q/Q and 42% Y/Y.

Sprint extended its streak of positive net-adds to two quarters by adding over 600 subs while T-Mobile reversed its customer losing streak thanks to the growth in the prepaid and connected devices segments.

The national prepaid penetration is touching 20%.

Applications and Services

Non-messaging services continues to grab 60-65% of the data revenues for the US carriers.

There is a significant shift taking place in terms of app revenues. In 2010, there will be more revenues generated (globally) from off-deck than on-deck for the first time and while the on-deck revenues are in billions, the decline trend looks irreversible. In the US, this shift will occur next year. (We released our mobile apps economy research paper earlier this year)

The usage and data consumption trends are enabling carriers to accelerate their 3.5G/4G plans and develop long-term business and technical strategies.

Handsets

Nokia sold 110.4M units in Q3 2010 amounting for 32% of the market share. Samsung continues to be one of the most agile players shipping a whopping 71.4M for a 21% share of the market. Apple also edged past RIM to be in the top 5.

While rest of the industry counts units, Apple counts $ and leads in the revenue share. It shipped 9.1M iPhones in Q3 despite the backlash over the antenna design.

Data Traffic (Slide 16)

· As we noted in our previous updates, the data traffic is now significantly more than the voice traffic. By end of 2010, we expect the average US consumer was consuming approximately 325 MB/mo up 112% in 12 months. The good news is that there are several solutions available and are being invented that will help manage the data growth starting with the tiered pricing plans.

Your feedback is always welcome.

Thanks.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Mar 2011. The next Global Wireless Data Market update will be issued in Dec 2010. Be sure to participate in our annual mobile industry predictions survey coming out in Dec 2010.

Disclaimer: Some of the companies mentioned in this paper are our clients.

Déjà vu - the experience of thinking that the current CTIA had occurred before.

This note summarizes the observations and opinions from the event, discussions, and briefings from the CTIA event that just concluded in San Francisco.

The Mobile Ecosystem

For me, the proceedings started with my talk “Mobile Apps: The Big Picture.” I generally start my talks these days by explaining the complexity of the mobile ecosystem. The traditional value-chains are morphing (and some cases being decimated) and the new ones are getting coalesced very fast. It is hard to summarize without going into the intricacies and the dynamic nature of the game. (I will be expanding on this theme again during my talk at University of Oxford this friday)

It is like a long marathon composed of 100m sprints where new players can enter and leave midstream. Players can merge en route to gain strength and speed or blow up before reaching the next 100m. The friends in this segment of the race might turn into competitors in the next segment. To throw a wrinkle into the mix, regulators or any one player can change the rules of the game such that 100m can become 50m or 200m and the players have to adapt and respond accordingly.

The race is in the open so the weather elements can impact but doesn’t stop the race. In such a brutally competitive environment, only the players who are super-agile or super-innovative or both have enough juice left to compete effectively in the next leg of the marathon. The successful ones are those where the C-suite and the troops are watching the KPIs of each step at the granular level so they have real-time intelligence of taking the next stride.

It requires the perfect blend of Usain Bolt and Samuel Wanjiru to compete in the “new” mobile landscape.

For example, Samsung, HTC, and Motorola (recently) have adapted remarkably well to this fast-paced marathon but their friendly rival LG has suffered and will need some time to regroup and be a force again. Microsoft faltered and didn’t adapt while new entrants like Apple and Google set the terms of the race. Watch out for what Facebook does in the space. Given their scale, their user understanding, and their product portfolio, if they execute certain elements of their strategy right, Facebook can be front runner in this ecosystem.

Some of the operators who have traditionally felt safe on their home turf are getting challenged. They are reinvigorating the industry segments they could have dominated before though it is probably too late in some areas.

Mobile Enterprise - The unglamorous cousin of the consumer segment

Enterprise is hot again. AT&T and Sprint have become very focused on becoming the “total solution providers” vs. just providing data subscriptions and devices. A&T is making a big push for the enterprise market and showcased several of its wins in the healthcare, education, retail, shipping, and other verticals. As I have talked about before, (mobile platform will) let a thousand industries bloom! Cloud computing is another area where we are going to see some interesting developments over the course of next 6 months (I will be moderating a panel on Mobile Cloud Computing at the upcoming Open Mobile Summit in Nov)

LTE

At CTIA, Verizon formally announced their LTE plans with almost 40 markets. It has moved aggressively in the last 24 months to get the network and slew of devices ready. Verizon’s marketing machine will let loose come Christmas and CES. AT&T also announced its “LTE ready” devices.

Mobile Devices: Competitive landscape

iPhone is likely to be launched on a second US carrier in Jan and is going to offer first true iPhone vs. Android test. In the meantime, a stable of Windows Phone 7 launched today after the announcement 8 months back in Barcelona. I do like a fresh approach to UI design akin to flipboardification of the apps icon-based layout (which is so desktopish). Things started to move in this direction with Motorola Blur last year and INQ a bit earlier.

The question is not if Microsoft has done a good job with WP7. It has. The question is - how soon does Microsoft come with its second round of handsets and software upgrades? And how soon will it be able to sign up additional OEMs. Remember, a few extra hops doesn’t guarantee unfair competitive advantage for the next 100m. Microsoft is starting from 0 and will have to execute on all fronts to be considered a serious contender come 2011 Christmas season. Finally, there is always room for another player, another platform. These things go in cycles. The trick is to capitalize on your opportunity and not be the one left standing when the music stops.

Coming back to my talk, I do think that an analytics driven UI is where we will end up on the smartphone UI and the whole debate around “mobile web vs apps” will be rendered moot to some extent. I expect Apple will come out with its iteration of the next generation UI soon.

Connected Devices

Mobile as a platform is maturing and we can see this in the growth in connected devices and vertically focused solutions - healthcare, energy, education, etc. The fact that the connected devices have become the next battle ground was clear from the fact that Ford had a major presence at the show. Their telematics strategy is very well executed. In our own work in the space, there is some cool stuff that is going to get rolled out in the next 24 months. Secondly, Samsung was displaying its tablet as if it was the only device it built. Apple has created a new category and others are lining up to cash in.

Mobile Apps vs. Web

The noise around “mobile apps vs. web” is reaching a fervent pitch. It is rather a silly debate. Developer care about reach, revenue potential, and the cost of the reach. Users care about the best user experience and cheapest access. Ecosystems are built around these two simple notions. Recent data from Comscore revealed something interesting. Looking at the smartphone data between apps and browser, while overall, the apps usage was higher compared to that of the browser, browser was considered a better way to navigate in various categories like news, search, and social networking by a good margin. However, games which happens to be generating the lion share of the apps revenue will continue to be a native play for some time to come because developers don’t want to compromise and the browsers are not there yet.

Over all, great to catch-up with friends and colleagues. CTIA, thanks for the networking party. 2011 looks pretty darn interesting already (we will be discussing the trends and opportunities in 2011 in our upcoming Mobile Breakfast Series event on Dec 8th)

Some of the other news worthy items were:

Sprint launched Sprint ID that helps customize the clutter on the device. Again, the limitations of the icon based UI are becoming clearer.

Androids keep multiplying like gremlins. Motorola launched a series of Android devices, some squarely focused on the enterprise.

CTIA released its semi-annual industry survey results: 293M subs, $79B in rev in first 6 months, data revs $25B up 12.4% in the first 6 months. Capital investment of $21.6B in last 12 months. SMS traffic in June 10 - 173B.

Some are realizing that a flatter network architecture is needed to manage data growth and margins. We have written extensively about this subject in our Yottabyte Series.

In a show devoid of cool demos, OpenMarket demoed interaction with the vending machine using a mobile device something Finns have been doing for a decade.

NFC was barely discussed but if all things line up, it could be one of the top stories of 2011.

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Nov 2010. The next Global Wireless Data Market update will be issued in Oct 2010.

Disclaimer: Some of the companies mentioned in this paper are our clients.

Summit Summary

Earlier this month, Chetan Sharma Consulting hosted its first mobile thought leadership executive summit – Mobile Future Forward. The sold-out event attracted leaders from the global mobile industry across the ecosystem to discuss and debate the future of mobile. This note summarizes the various discussions from the summit.

Some of the key themes discussed by the speakers and panelists were:

1. The Mobile Ecosystem is becoming more complex and competitive by the day

2. Broadband is exploding around the globe, Nation’s competitiveness and prosperity is being defined by the quality and depth of Broadband

6. Emerging Devices are taking the lion of share of growth in some western markets

7. Given the devices and networks, content, media, services are moving to the cloud

8. New experiences are being introduced that will impact monetization and interaction with computing and technology

9. World is becoming flatter by the day

10. Mobile as a platform is booming and several industry verticals are exploding

11. Context and Analytics are key currency for tomorrow

12. There is significant reallocation of revenues underway

13. The fight for developer mind share is getting intense

As technologists, we get too enamored with the technical details and specs but what’s most important is how can technologies be applied to make lives of every day consumers better. If a new solution or a service only benefits or thrills a few, it is destined to miss the mass market. No one understands the mass market better than Procter & Gamble, and no company in the world touches more consumers with more products than Procter & Gamble (with over 40-50 billion items per year). Technology plays a central role in how P&G thinks about engaging consumers. Last year, I had the privilege of spending some time with Steve David, our first keynote speaker. His understanding of the interplay between technology and consumer interaction and behavior is very deep and his enthusiasm for using technology to change the world infectious. Steve spent over 30 years at P&G , the final assignment as P&G’s CIO responsible for their Internet Strategy.

Steve laid out the case for Advocacy being the new measure of marketing. It has a lasting impact on the brand, the sales, and the relationship with the consumer. Companies who have a better understanding of the customer via sophisticated analytics and can quickly take the solutions and products that consumer want and need gain long-term competitive advantage. Insights from the market must be processed in real-time that can empower decision making at every level of the company. And mobile is central to this strategic shift. Mobile is being used to attack the counterfeit problem worldwide, in formulating personal recommendations as trust in brands erodes, in collecting analytics, and engaging interactions with products and services using NFC, etc. Steve ended with the old Chinese proverb, “When the wind changes direction, there are those who build walls and there are others who build wind mills.” What are you going to build?

Fred Devereux, President, AT&T West in his address on “The Next Big Thing” honed in on the emerging connected devices ecosystem and how AT&T is retooling itself to take advantage of the boom. The AT&T Emerging Devices organization is setup to behave and operate like a startup with hundreds of devices being approved in a short amount of time. The new generation of connected devices range from eReaders, PNDs, Telematics, Cameras, Camcorders, Picture Frames, Tablets, Tracking Devices, Gaming Devices, and Smart Meters. While the ARPU of these connection is low, the margins are high due to negligible overhead in operations, sales, and marketing. The importance of this category is evident from the research data we reported in our last quarterly report which indicated that there are more connected devices being added than postpaid net-adds and operators are starting to list them as separate line items in their financial statements. Fred also discussed AT&T’s plans to deploy LTE in 2011-.

Dr. Genevieve Bell, Fellow at Intel is one of the most fascinating anthropologists out there with an acute sense of technology evolution and how humans react and adapt to changes around them and how technology needs to adapt to humans and their needs in different habitats. She had some interesting stats from her research e.g. the household sizes vary significantly by countries – India has only 5% of the households as single-person households while France and Germany have over one third households as single-person. Boomers will represent more than half of the population of China, Japan, and EU by 2012. These demographic shifts have significant impact on how technology is used and how media is consumed. The keynote was filled with priceless anecdotes and research items that informed and gave the technologists something to think about and that the technologists are not the proxy for rest of the population. Her book “Telling Techno-Cultural Tales” is being published by MIT Press and is coming out next year. So, be on the lookout for that.

Mobile Advertising is in the news lately in the US. About 11 years ago, a young man named Takayuki Hoshuyama was making waves in the mobile advertising space. In 1999, he helped found D2Communications - a successful joint venture between the largest advertising firm in Japan - Dentsu and the largest and one of the most innovative operator on the planet - NTT DoCoMo. He was one of the original members of the Mobile Advertising Team for the i-mode service 11 years ago. In June, he was appointed CEO of D2C. Hoshuyama-san talked about the future of mobile advertising. Japanese mobile ad market is over $1B (though it represents only 1.7% of the overall ad spent) and with the advent of 4G/LTE the opportunities are enormous. Display outscores Search by 3:1 in ad revenues. Mobile is some embedded in Japanese culture that it is just assumed just like my good friend and coauthor Dr. Yasuhisa Nakamura, then CTO of NTT DoCoMo wrote back in 2002 in our book “the wireless infrastructure will become indistinguishable from air i.e. omnipresent”

Hoshuyama-san also talked about the evolving role of the operators in the ecosystem with some of them focused on becoming the cloud service providers and broadcasters.

After the keynotes, we shifted to panel discussions. The first one dealt with the disruptive forces in the ecosystem with Mike Sievert, Chief Commercial Officer, Clearwire, Lixin Cheng, CEO, ZTE USA, and Subba Rao, CEO, Tata DoCoMo – three leaders who are disrupting the status quo. All three agreed that the openness of Android will make it the most dominant OS in the coming years. Lixin talked about how the infrastructure business is becoming a software business with SDR design of technology standards and evolution. He also suggested that we as an ecosystem need to simplify the business models and the consumer purchasing process of bandwidth and connectivity before the connected device revolution takes significant hold. India is the fastest growing market but the ARPU levels are 1/10th of what they are in the US. Given that the market just spent over $100B on the 3G auction, the investment recovery model is unclear and the market is ripe for a big shakeout. Telenor, having lost over half a billion dollars is desperate to get out of the market. The pains of globalization are showing up in other regions as well. Mike mentioned the high average data consumption at Clearwire (currently at 7 GB/mo) – clearly a precursor of what’s to come (our research shows the national average was 230 MB/mo as of Q2 2010). In terms of new technology areas, the panel was interested in products that help with spectrum efficiency, reducing the cost structure, and in improving the battery performance.

As part of the Mobile Future Forward Initiative, we had also worked on two other projects:

· The Mobile Future Forward Book that consisted of thought provoking essays on the future of mobile from the speakers of the summit and

· The global student paper contest that invited the papers form university students from the around the world

It required enormous collaboration with the folks around the globe in a very short amount of time. We are very proud of the outcome.

Mobile Future Forward Book

The second project related to a limited edition book by Chetan Sharma Consulting (published by Futuretext) exclusively for the event. Some of these summit speakers put their insights and ideas on paper that resulted in this book. We are very grateful to the authors (and their respective organizations) who carved out time from their busy schedules to pen some really insightful commentary on how they see the mobile industry evolve both holistically and in the various segments of the ecosystem. While the views are quite diverse and bring together perspectives from different angles, everyone agrees, 2010-2020 will be one heck of a time period for innovation.

As a mobile strategist, I get to see some of the cool technologies before they hit the market. For the demo this year, we selected Microvision’s cool projection technology where you can interact with the projected screen in thin air by waving hands. Yes, you got it. You had to be there to see it. It was shown for the first time to the general public and we are thankful to Selvan Vishwanathan and Andrew Rosen, the two engineers (and their colleagues) behind this exciting emerging technology that will expand the horizons of mobile interactivity and media engagement.

The afternoon sessions started delving into specific topics and details that were touched upon at the high level during the morning sessions. Each of the panels had an absolutely stellar cast who are deeply engaged in defining the mobile ecosystem right now.

Network and Mobile Data Evolution 2010-2015

Wim Sweldens, President - Wireless Division, Alcatel-Lucent,

Neville Ray, Chief Network Officer, T-Mobile,

Bob Azzi, Senior Vice President, Sprint,

Matt Bross, CTO and Vice Chairman, Huawei

Sean Cai, Vice President - Advanced Wireless Technology, ZTE,

Ken Denman, CEO, Openwave (moderator)

There is a big debate about network evolution - how fast does LTE need to come to the market? Will LTE be enough to help with the data tsunami. The consensus was a resounding No but LTE brings in some key capabilities like an all-IP network that enables new capabilities for multimedia applications and services, lowers the per bit cost, and reduces latency for superior user experience. Of course, the RAN is only part of the story, the backhaul needs to get upgraded as well to handle the load. The panel also emphasized simplicity in services without making things burdensome for the consumer with new technology. The other area of concern is of course the spectrum. Will there be ever enough spectrum? The issue is more acute for some operators. Finally, the focus need not to be on the bandwidth or the latency, from a user’s point of view, it is always about the services and things they can do with more bandwidth and lower latency.

Future of Content, Engagement, and Monetization

Louis Gump, Vice President - Mobile, CNN,

Omar Javaid, Vice President, Converged Media, Motorola (moderator),

Paul Palmieri, CEO, Millennial Media,

Rob Glaser, Chairman, Real Networks and Partner, Accel

Superphones and smartphones have changed the landscape for content, engagement and monetization. Superphones are most open and it is reflected in the results, more engagement and higher app usage. Apple/Android have also put US back in the leadership role when it comes to devices. CNN has seen high degree of non duplicated reach and reach is king when it comes to mobile advertising. The ad platforms are going into the next stage of evolution with more multimedia, better monetization opportunities, and higher value for the consumer. For content providers, ads can’t be the only strategy to generate revenue, subscriptions and/or micro transactions need to be part of the equation as well.

It is a complex issue and our insightful panel talked through the intricacies and the balance of monetizing using consumer data while meeting user’s expectations on privacy. One has to give something of value to the consumer before they trade up. Advertisers like adidas want to move from 1-2-many to 1-2-1 relationship with the consumer that increases the volume and quality of the transactions. The valuable variables to track are location, propensity to buy, past actions, traffic inputs, etc. Discovery and recommendations also become important part of the whole process. Of course, regulators are eager to jump in as well. It will be one of the key issues defining the industry landscape over the next 5 years.

mHealth - The Impact on Society and Global Health

Dr. Sailesh Chutani, CEO, Mobisante (moderator)

Jon Stross, General Manager and VP, Babycenter.com

Tim Wood, Director, Grameen Foundation

Greg Brandenberg, CEO, Columbia Basin Health Association

Dr. Suzanne Clough, Chief Medical Officer, Welldoc

mHealth is one of those areas which has been talked about for a long time and where mobile is starting to have a truly disruptive run at the industry. While the regulations and the dinosaur health care industry have been slow to adapt, there are a number of innovative companies like Welldoc, Babycenter.com, Mobisante, and others who are forcing rethink and change in the status quo. Greg’s CBHA is forced to think differently and has looked to technology to solve their challenges. Serving in the rural areas of WA state, his team has been testing out new solutions such as cell phone based ultrasound system from Mobisante that is 1/10th the cost of what GE sells for. It is much more portable and flexible and works well with the field work force. Tim’s Grameen Foundation is similarly leading the charge in nations like Ghana where mobile has been used to solve real-life health issues. Jon’s Babycenter has been expanding in other regions and increasing revenues at the same time. However, the test results and trials can still take inordinate amount of time (it was 3 years for one of the trials). The opportunity is immense but regulators, healthcare industry, pharma giants, and the rest are starting to come to grips with the role that mobile can play in transforming lives and P&Ls.

Cloud is changing IT and cloud is going to change mobile media. It helps take out some of the complexities of media consumption, management, and sharing for the consumers and provides a lower cost structures for the media companies. There are opportunities for operators to provide cloud based services at many levels - storage, media, billing, bandwidth, profile, analytics, network intelligence and so on and so forth. Some are easier to implement while others requires more investment and change in DNA. From a developer’s perspective, cloud based services will be ideal to increase reach but we are not there yet as the capabilities of the browser are not comparable to the native environment on platforms like iOS and Android. Better user experience is essential and developers won’t compromise.

Evolution of Communication and Social Interaction

Mario Queiroz, Vice President - Product Management, Google

David Weiden, General Partner, Khosla Ventures

Robin Schofeld, Principal, Booz&Co (moderator)

Erick Tseng, Head of Mobile, Facebook

Pankaj Kedia, Head of Mobile Ecosystems, Intel

The panel delved into how the communication ecosystems might evolve. While there is discussion about open and closed (too much at times), it is about executing on a strategy that touches the most number of consumers. The closed gardens of Apple is quite dominating and so is the evolving Android ecosystem which is relatively open. At the end of the day, developers are looking to make a buck with the least amount of resources and reach the most of amount of users. Cloud based communications services are about to change the landscape in a big way. Google and Facebook both have had good successes and both suggested that we are just getting started and more innovation is going to come in the form of personalization and social interaction. Operators while ceding some of the communication territory can still have a viable broadband business. As far as social on mobile is concerned, we are still in the early days with lots of opportunities to enhance and engage.

The fact that there are more mobile phones than toothbrush brings home the point of the pervasiveness of mobile around the globe. The panel gave several examples of how “connectedness” is spreading across other electronic devices as well e.g. in Netherlands, 30K home care workers are equipped with NFC enabled devices which help interact with the patients (opens the door as well) without the need for paperwork, the records, helps with navigation. Overall result - happier workers, higher efficiency, and reduced carbon emission. The mobility for “connected devices” will try to leverage all RF radios as needed - 3G, 4G, Bluetooth, WiFi, Zigby, etc. Digital signage is emerging as a new area for consumer interaction and information. Some of the industries are on the verge of significant change - e.g. insurance where car insurance rates are given based on driving habits learned via telemetry vs. the old actuary table based rating systems. NFC is also enabling a lot of commerce opportunities by bringing the online world together with the physical world. However, as the ecosystem evolves, we need to also worry about QoS, security, and reliability concerns that various vertical industries have. Of course, the net-neutrality debate impacts the evolution. There are several scenarios where prioritization of data traffic is essential in emergency situations (ambulance transmission, fire fighting, etc.).

At the Intersection of Gaming, Social, and Commerce

Tim Chang, Partner, NVP (moderator)

Prashant Fuloria, Director - Facebook Credits, Facebook

David Marcus, CEO, Zong

Andrew Lacy,Senior Vice President, Disney Games

Alex Tokman,CEO, Microvision

Micro transactions is the new currency that scales up to billions of dollars in gaming and social networking. Free drives interest and the core 2-5% drive the revenues. If you ask for payment up front, virality component fizzles and the longevity declines. iTunes has been the gold standard for payments, carrier billing is starting to shape up and it will benefit the developers. HTML5+ in theory makes sense and is nice enhancement but the app experience is compelling for users. Discovery continues to be the sore spot and the burning opportunity. Whichever platform and mode of operation helps developers make more money, that’s where the momentum will shift. Today it is the iPhone but rival models are starting to pop up.

Our heartfelt thanks to everyone who helped in making Mobile Future Forward successful especially the sponsors (Amdocs, Millennial Media, Real Networks, ZTE, Clearwire, Ericsson, OpenMarket, Bango, Intel, Openwave, Wavefront, and Department of Commerce), participants, the moderators, and the speakers. Thanks to Caroline Lewko and David Smith for taking good notes. Planning for Mobile Future Forward 2011 is underway. Until then, best wishes and good luck in your pursuits, and we hope to see you next year. Thank You.

The US wireless data market grew 6% Q/Q and 22% Y/Y to exceed $13.2B in mobile data service revenues in Q2 2010 - on track so far to meet our initial estimate of $54B for the year.

Having narrowly edged NTT DoCoMo last quarter for the first time, Verizon Wireless maintained its number one ranking for the 1H 2010 in terms of the operator with the most mobile data revenues (though the difference was thinner than the amoeba membrane). The total wireless connections for Verizon were almost 100M with 92.1M being the traditional subscriber base. Rest of the 3 top US operators also maintained leading positions amongst the top 10 global mobile data operators.

Sprint had the first positive netadd quarter in 3 years and has been slowly and steadily turning the ship around. T-Mobile did better on the postpaid netadds but overall additions declined again. The larger question for the market is if 4 large players can stay competitive. Generally, the answer is no. But these are different times and there are a number of permutations and combinations that are possible.

The US subscription penetration crossed 95% at the end of Q2 2010. If we take out the demographics of 5 yrs and younger, the mobile penetration is now past 100%. While the traditional net-adds have been slowing, the “connected device” segment is picking up so much that both AT&T and Verizon added more connected devices than postpaid subs in Q2 2010. Given the slow postpaid growth, operators are fiercely competing in prepaid, enterprise, connected devices, and M2M segments.

Data traffic continued to increase across all networks. By 1H 2010, the average US consumer was consuming approximately 230 MB/mo up 50% in 6 months. US has become ground zero for mobile broadband consumption and data traffic management evolution. While it lags Japan and Korea in 3G penetration by a distance, due to higher penetration of smartphones and datacards, the consumption is much higher than its Asian counterparts. Given that it is also becoming the largest deployment base for HSPA+ and LTE, most of the cutting edge research in areas of data management and experimentation with policy, regulations, strategy, and business models is taking place in the networks of the US operators and keenly watched by players across the global ecosystem.

As we had forecasted, the tiered pricing structure for mobile broadband touched the US shores with AT&T becoming the first major operator to change its pricing plan based on consumer consumption. We will see the pricing evolve over the next 2-4 quarters as the US mobile ecosystem adjusts to the new realities and strategies for mobile data consumption.

In the connected device category, iPad like its flashy cousin dominated the headlines, the sales numbers, and the industry profits. The device sent every slate maker back to the drawing board, many projects were cancelled and strategies are still being formulated to capture a new burgeoning space and Apple again has a massive lead of mindshare and pocketbook.

Kids of the now generation are growing with connected electronics that is fundamentally altering the behaviors and expectations of interaction, communication, consumption, and monetization.

All this has setup an absolutely fascinating period in the communication/computing industry. Convergence is everywhere and is leading to fundamental reset of the value chains and ecosystems. We are going to be discussing the ins and outs of how the industry is going to evolve in the next decade in our Sept 8th event – Mobile Future Forward which is bringing exceptional industry thought-leaders, inventors, and doers to brainstorm, discuss, and debate what’s next. Hope you can join the discussion.

What to expect in the coming months?

31% of the US subscription base is now smartphones.

The pace of product introduction is accelerating with each quarter. Devices of all shapes and sizes are coming into the market literally every week. Players are having to re-evaluate their businesses and long-term strategies. Several new impressive devices got introduced during the course of 1H of 2010 including the iPad and EVO.

There are several players whose future is at stake (to put it mildly). The competition has grown fierce and companies are finding it hard to take ideas from R&D to products in market in a short amount of time.

Microsoft announced its comeback with the W7 commercial launch imminent. The change in UI was refreshing and the expectations are quite high. W7 v2 is likely around the corner to update on the flaws of v1. HP acquired Palm in an attempt to become relevant again in the mobile device space. It has been an action packed 1H 2010 and we can expect more of the same for the remainder of the year.

2010 has also been active on the regulatory front as the national broadband plan was unveiled in March and the subsequent debate over the course of nations broadband future kept the spectrum, net-neutrality, and exclusivity issues at the forefront.

To start planning for 4G, 5G, and beyond, US should think about rolling a 50 year broadband plan. While more spectrum is always helpful, will we have all the spectrum we need in 2050? or do we need to invent new technologies and business models that use spectrum more wisely? This topic will keep the industry occupied for some time to come. (We will be going in-depth into this subject at our Sept event with some very senior and experienced executives)

2010 is also the year of network rollouts. T-Mobile has been rolling out HSPA+ at an impressive rate, Clearwire announced its intention to move to LTE, Verizon is betting big on LTE and looking for competitive marketing advantage over the course of the next 12 months. AT&T has been adding backhaul, upgrading to HSPA+ and planning for LTE all at once. Even the smaller carriers like MetroPCS are looking for competitive advantage with quicker LTE launch and beat others by carrying the first LTE smartphone. (We will be releasing the next edition of our “State of the “Mobile” Broadband Nation” paper later this year)

As we had mentioned last year, the mobile data traffic kept on growing disproportional to the revenues. A series of solutions have come into the market from players big and small. We released the second edition of our in-depth research paper on data growth - "Managing Growth and Profits in the Yottabyte Era" last quarter.

We will be keeping a very close eye on the micro- and macro-trends and reporting on the market on a regular basis in various private and public settings.

Against this backdrop, the analysis of the Q2 2010 US wireless data market is:

Service Revenues (Slides 7, 16)

The US Wireless data service revenues grew 6% Q/Q to $13.2B in Q210. Compared to Q209, the mobile data service revenues grew 22%.

Verizon and AT&T accounted for 75% of the increase in data revenues in Q2 2010.

T-Mobile’s 3G drive is starting to pay off. While the net-adds were still in the red, its data growth is starting to match with its peers. The 20% 3G smartphone base definitely helps.

Verizon Wireless again nudged past NTT DoCoMo in overall mobile data revenues by a whisker. By the end of the year, China Mobile and AT&T are also likely to cross their Japanese counterpart in quarterly mobile data service revenues.

AT&T and Verizon now account for 70% of the market data services revenues and 62% of the subscription base.

ARPU (Slides 8-11)

The Overall ARPU increased by $0.46 reversing the declining trend of the past three quarters. Average voice ARPU declined by $0.13 while the average data ARPU grew by $0.58 or 4% Q/Q.

The average industry percentage contribution of data to overall ARPU is now 31% in Q210.

Verizon led in data ARPU with $17.37 followed by AT&T and Sprint. In terms of % contribution, all the top three operators exceeded the 30% mark. T-Mobile ended the quarter with approximately 25% of its revenue coming from data services.

Subscribers (Slides 12-14)

Overall netadds stayed stable at just over 3M with AT&T gaining the lion-share (though their count now includes the connected devices while other operators don’t specifically include that in the calculations).

The texting see-saw between US and Philippines continued in Q210. US averaged around 639 messages/user/mo marginally behind Philippines.

For the third straight quarter, AT&T reported more net-adds from connected devices than postpaid subs. Connected devices are now 7% of AT&T’s subscription base.

Sprint got back into the positive net-adds territory again after 3 years. T-Mobile’s net-adds continued to decline. T-Mobile’s 20% and Sprint’s 23% subscriber base is now prepaid. The national prepaid penetration is touching 20%.

Applications and Services

Non-messaging services continues to grab 60-65% of the data revenues for the US carriers.

There is a significant shift taking place in terms of app revenues. In 2010, there will be more revenues generated (globally) from off-deck than on-deck for the first time and while the on-deck revenues are in billions, the decline trend looks irreversible. In the US, this shift will occur next year. (We released our mobile apps economy research paper earlier this year)

The usage and data consumption trends are enabling carriers to accelerate their 3.5G/4G plans and develop long-term business and technical strategies.

Handsets

Nokia sold 111M units in Q2 2010 amounting for 36% of the market share. Samsung again had a solid quarter with 64M devices sold with the share at 21%. LG Electronics at 10%, Sony Ericsson and RIM at 3.6% rounded up the top 5.

Apple shipped 8.4M iPhones in Q2 but the criticism over the antenna design took some shine out from yet another home run.

Smartphone penetration increased to 31% in the US market

Data Traffic (Slide 15)

· As we noted in our last update, the data traffic is now significantly more than the voice traffic. By 1H 2010, the average US consumer was consuming approximately 230 MB/mo up 50% in 6 months. The good news is that there are several solutions available and are being invented that will help manage the data growth starting with the tiered pricing plans.

To discuss all these trends and more, we are putting together a unique Mobile Future Forward Executive Summit and are fortunate to have the company of some of the sharpest minds in the industry, folks who both have the vision to shape the evolution and the authority to invest billions of dollars this decade to make things happen. Hope to see you in Seattle on Sept 8th.

Each panel discussion will involve luminaries/experts on specific topics, for e.g.

Opportunities in Mobile

Mike Sievert, CCO, Clearwire

Dr. Genevieve Bell, Fellow, Intel

Shi Lirong, President, ZTE

Subba Rao, CEO, Tata DoCoMo

Evolution of Communication/ Engagement

Christopher Dean, Chief Strategy Officer, Skype

Erick Tseng, Head of Mobile, Facebook

Mario Queiroz, VP, Google

David Weiden, General Partner, Khosla Ventures

The size of the panel will be small and the time duration long so we can delve deep into the issues and questions. For more panel, speaker, sponsor, and program details, please visithttp://www.mobilefutureforward.com

Your feedback is always welcome.

Thanks.

Chetan Sharma

We will be keeping a close eye on the trends in the wireless data sector in our blog, twitter feeds,future research reports, and articles. The next US Wireless Data Market update will be released in Nov 2010. The next Global Wireless Data Market update will be issued in Sept 2010.

Disclaimer: Some of the companies mentioned in this paper are our clients.